SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the fiscal year ended September 30, 1998
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
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Commission File No. 0-27606
WHG Bancshares Corporation
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(Name of Small Business Issuer in Its Charter)
Maryland 52-1953867
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
1505 York Road, Lutherville, Maryland 21093
- ------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (410) 583-8700
--------------
Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $8,854,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the average bid and asked price of the registrant's
Common Stock on December 4, 1998, was $10.8 million.
As of December 4, 1998, there were issued and outstanding 1,385,780
shares of the registrant's Common Stock.
Transitional Small Business Disclosure Format (check one): YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
September 30, 1998. (Parts I and II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended September 30, 1998. (Part III)
1
<PAGE>
PART I
WHG Bancshares Corporation (the "Company") may from time to time make
written or oral "forward-looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this annual report on Form 10-KSB and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Description of Business
- --------------------------------
General
The Company is a Maryland corporation organized in December of 1995 at
the direction of Heritage Savings Bank, F.S.B. (the "Bank") to acquire all of
the capital stock that the Bank issued in its conversion from the mutual to
stock form of ownership (the "Conversion"). On March 29, 1996, the Bank
completed the Conversion and became a wholly owned subsidiary of the Company.
The Company is a unitary savings and loan holding company which, under existing
laws, generally is not restricted in the types of business activities in which
it may engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
conversion.
The Bank which was founded in 1902 under the name West Baltimore
Building Association is a federally chartered stock savings bank headquartered
in Lutherville, Maryland. In 1975, the Bank changed its name to Heritage Savings
Association and in 1987, the Bank became a federal savings bank and changed its
name to "Heritage Savings Bank, F.S.B.". The Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits have been federally
2
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insured by the Savings Association Insurance Fund ("SAIF") and its predecessor,
the Federal Savings and Loan Insurance Corporation, since 1954. The Bank is a
member of and owns capital stock in the FHLB of Atlanta, which is one of the 12
regional banks in the FHLB System. The Bank has investments in two service
corporations. See " -- Subsidiary Activity."
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
Competition
The Bank is one of many financial institutions serving its market area
which consists of the Baltimore, Maryland metropolitan area that includes
Baltimore City and its five surrounding counties, Baltimore County, Harford
County, Howard County, Carroll County, and Anne Arundel County. The competition
for deposit products comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, and multi-state regional
banks in the Bank's market area. Deposit competition also includes a number of
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
Lending Activities
Loan Portfolio Data. Set forth below is selected data relating to the
composition of the Bank's loan portfolio by type of loan and type of security on
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1998 1997
---------------------- --------------------
$ % $ %
--------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Residential..................................... $67,149 86.07 $ 72,195 89.59%
Commercial (real estate)........................ 4,799 6.15 3,242 4.02
Construction loans.............................. 1,968 2.52 1,462 1.82
Lines of credit................................. 2,031 2.60 1,620 2.01
Land/lot........................................ 952 1.22 682 .85
Home improvement loans.......................... 6 .01 7 .01
Savings account loans........................... 261 .33 300 .37
Commercial loans secured by lease
finance receivables........................... 853 1.10 1,075 1.33
------ ------ ------ ------
$78,019 100.00% 80,583 100.00%
====== ======
Less:
Undisbursed portion of loans in process......... (1,714) (1,198)
Deferred loan origination fees.................. (521) (538)
Allowance for loan losses....................... (301) (250)
Unamortized discount on loans purchased......... (125) (147)
------ --------
Total loans, net.................................. 75,358 $ 78,450
====== ========
</TABLE>
3
<PAGE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's
loan portfolio at September 30, 1998. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $16.6 million for the year ended September 30, 1998.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
1-4 family real estate mortgage... $227 $1,123 $65,673 $67,113
Other residential commercial...... -- 541 5,252 5,793
Construction...................... -- -- 1,968 1,968
Consumer.......................... 261 -- -- 261
Lines of credit................... 1,631 400 -- 2,031
Commercial loans secured by lease
finance receivables............. 134 719 -- 853
------ ------ ------ ------
$ 2,253 $2,783 $72,983 $78,019
====== ====== ====== ======
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have pre-determined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
<S> <C> <C> <C>
1-4 family real estate mortgage.............. $35,080 $31,806 $66,886
Other........................................ 4,156 1,637 5,793
Construction................................. 1,968 -- 1,968
Lines of Credit.............................. -- 400 400
Commercial loans secured by lease finance
receivables................................ 719 -- 719
------ ------ ------
Total.................................... $41,923 $33,843 $75,766
====== ====== ======
</TABLE>
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market area. The Bank
generally originates one- to four-family residential mortgage loans in amounts
up to 80% of the lesser of the appraised value or selling price of the mortgaged
property without requiring mortgage insurance. In certain instances, the Bank
will originate a mortgage loan in an amount up to 95% of the lesser of the
appraised value or selling price of a mortgaged property, however, mortgage
insurance for the borrower is required. A mortgage loan originated by the Bank,
whether fixed- or adjustable-rate, can have a term of up to 30 years.
The Bank requires for all adjustable-rate mortgage loans that the
borrower qualify at the current fully indexed rate. The Bank's adjustable-rate
mortgage loans provide for periodic interest rate adjustments of plus or minus
2% with a maximum adjustment over the term of the loan to 10.75% and
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a minimum adjustment to 6%, except during the first year following origination.
Adjustable-rate mortgage loans typically reprice every year, and provide for
terms of up to 30 years with most loans having terms of between 15 and 30 years.
Mortgage loans originated and held by the Bank in its portfolio generally
include due-on-sale clauses which provide the Bank with the contractual right to
deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Bank's consent.
The Bank offers adjustable-rate mortgage loans using the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year.
Interest rates charged on mortgage loans are competitively priced based on
market conditions and the Bank's cost of funds. Generally, the Bank's standard
underwriting guidelines for mortgage loans conform to FHLMC guidelines. It is
the current policy of the Bank to remain a portfolio lender. The Bank typically
charges a 1% to 2% origination or commitment fee.
Adjustable-rate mortgage loans decrease the risks associated with
changes in interest rates by more closely reflecting these changes, but involve
other risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the adjustable-rate mortgage loan documents, thereby potentially
limiting their effectiveness during periods of rising interest rates. These
risks have not had an adverse effect on the Bank.
Commercial Loans. Commercial loan portfolio consist primarily of loans
secured by real estate, such as church loans and small office building loans.
Loans secured by commercial property may be in amounts up to 75% of the
appraised value for a maximum term of 25 years. Commercial lending entails
significant additional risks when compared with one- to four-family residential
lending. For example, commercial loans typically involve larger loan balances to
single borrowers or groups of related borrowers, the payment experience on such
loans typically is dependent on the successful operation of the project and
these risks can be significantly impacted by the cash flow of the borrowers and
supply and demand conditions in the market for commercial office, retail and
warehouse space.
Construction Loans. Construction loans are made on a long term basis
and are classified as construction/permanent loans. Approximately 95% of the
Bank's construction loan portfolio is for the construction of single-family
residential property to the individuals who will be the owners and occupants
upon completion of construction. These construction loans usually require no
principal payments during the first six months, after which the payments are set
at an amount that will amortize over the term of the permanent loan. The terms,
including interest rate, of single family residential construction loans are the
same as those for a loan to purchase or refinance a previously constructed
single family residence. The maximum loan to value for other construction loans
is dependent on the type of property that will be constructed.
Consumer Loans. Consumer and home equity loans are originated by
Bankers Affiliate, formerly known as Cash, Inc., a subsidiary of the Bank, of
which the Bank owns a one-third interest. The Bank also makes loans secured by
savings accounts in the Bank (share loans) which generally have rates that
adjust with the rate on the underlying account and are typically 2% above the
rate on the underlying savings account. Share loans are offered subject to a 90%
loan to collateral value limit.
5
<PAGE>
Loan Approval Authority and Underwriting. All loans must be approved by
the Bank's loan committee and all loans over $500,000 must be approved by the
Bank's Board of Directors. Upon receipt of a completed loan application from a
prospective borrower, a credit report is generally ordered, income and certain
other information is verified and, if necessary, additional financial
information is requested. An appraisal from an independent fee appraiser of the
real estate intended to be used as security for the proposed loan is obtained.
The Bank makes construction/permanent loans on individual properties. Funds
advanced during the construction phase are held in a loan-in-process account and
disbursed based upon various stages of completion in accordance with the results
of inspection reports that are based upon physical inspection of the
construction by a loan officer. For real estate loans, the Bank requires title
insurance. Borrowers must also obtain fire and casualty insurance (for loans on
property located in a flood zone, flood insurance is required) prior to the
closing of the loan.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 15 days of the date of issuance. At September 30, 1998, the
Bank had $1.1 million of commitments to cover originations and $1.7 million in
undisbursed funds for loans in process. Management believes that virtually all
of the Bank's commitments will be funded.
Loans to One Borrower. SAIF-insured savings bank are subject to certain
lending limitations to a single borrower or group of borrowers. Under current
law, the Bank's lending limits equals an amount equal to 15% of unimpaired
capital and unimpaired surplus on an unsecured basis and an additional amount
equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured
by readily marketable collateral (generally financial instruments, not real
estate) or $500,000, whichever is greater. Savings associations are authorized
to make loans to one borrower, for any purpose, in an amount up to $500,000. The
Bank's maximum loan to one borrower limit was approximately $2.5 million at
September 30, 1998.
Non-Performing and Problem Assets
Loan Delinquencies. If a loan continues in a delinquent status for 90
days past due and no repayment plan is in effect, the account is turned over to
an attorney for foreclosure. Management meets regularly to determine when
foreclosure proceedings should be initiated and the borrower is notified when
foreclosure has been commenced.
Loans are generally placed on a non-accrual status when the loan
becomes more than 90 days delinquent or when, in the opinion of management, the
collection of additional interest is doubtful. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent interest payments, if any, are either applied to the
outstanding principal and interest balance in accordance with the contractual
terms of the loan.
Non-Performing Assets. The following table sets forth information
regarding non-accrual loans, real estate owned, and certain other repossessed
assets and loans. As of the dates indicated, the Bank had no loans categorized
as troubled debt restructuring within the meaning of SFAS 15.
6
<PAGE>
<TABLE>
<CAPTION>
At September 30,
----------------
1998 1997
------- -------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units........................... $ 383 $ 767
Commercial.............................................................. -- 70
----- ------
Total non-accrual loans................................................... 383 837
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units........................... -- --
Non-mortgage loans:
Consumer................................................................ -- --
----- ------
Total accruing loans greater than 90 days past due........................ -- --
----- ------
Total non-performing loans................................................ $ 383 $ 837
===== =====
Foreclosed real estate.................................................... -- --
===== =====
Total non-performing assets............................................... $ 383 $ 837
===== =====
Total non-accrual and accrual loans to net loans.......................... .51% 1.07%
===== =====
Allowance for loan losses to total non-performing loans,
including loans contractually past due 90 days or more.................. 78.59% 29.86%
===== =====
Total non-accrual and accrual loans to total assets....................... .29% .85%
===== =====
Total non-performing assets to total assets............................... .29% .85%
===== =====
</TABLE>
Interest income that would have been recorded and collected on loans
accounted for on a non-accrual basis under the original terms of such loans was
$25,391 for the year ended September 30, 1998.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount
7
<PAGE>
of its valuation allowances is subject to review by the OTS, which may order the
establishment of additional general or specific loss allowances. A portion of
general loss allowances established to cover possible losses related to assets
classified as substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
On the basis of management's review of its assets at September 30,
1998, the Bank had $334,000, and $1,586,000 classified as substandard and
special mention assets, respectively. The Bank had no doubtful or loss assets at
September 30, 1998.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired, it is recorded at the fair value at
the date of foreclosure less estimated costs of disposition.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the losses that may
be incurred in the Bank's loan portfolio. Such evaluation, which includes a
review of all loans of which full collectibility of interest and principal may
not be reasonably assured, considers the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, any
existing guarantees, past performance of the loan, available documentation for
the loan, legal impediments to collection, financial condition of the borrower,
and current economic conditions.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
8
<PAGE>
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated:
At September 30,
----------------------------
1998 1997
-------- --------
(In thousands)
Total loans outstanding.......................... $75,358 $78,450
====== ======
Average loans outstanding........................ $77,911 $78,643
====== ======
Allowance balances (at beginning of period)...... $ 250 $ 195
Provision (credit):
Residential.................................... 185 61
Commercial real estate......................... 10 --
Consumer....................................... --
Net (charge-offs) recoveries:
Residential.................................... (144) (6)
Commercial real estate......................... -- --
Consumer....................................... -- --
------- -------
Allowance balance (at end of period)............. $ 301 $ 250
======= =======
Allowance for loan losses as a percent
of total loans outstanding..................... .40% .32%
Net loans charged off as a percent of
average loans outstanding...................... .39% .01%
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------
1998 1997
-------------------------- ------------------------
% of Loans in % of Loans in
Each Category Each Category
Amount To Total Loans Amount To Total Loans
------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential mortgage...................... $ 157 86.08% $ 116 89.60%
Commercial (real estate).................. 61 6.15 51 4.02
Construction ............................. 68 2.52 68 1.82
Lines of credit........................... 4 2.60 4 2.01
Land/lot.................................. 1 1.22 1 .85
Consumer.................................. -- .33 -- .37
Commercial loans secured by lease
finance receivables..................... 10 1.10 10 1.33
---- ------ ---- -------
$ 301 100.00% $ 250 100.00%
==== ====== ==== =======
</TABLE>
9
<PAGE>
Investment Activities and Mortgage-Backed Securities
General. The Bank is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short term
securities and certain other investments. The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities. The Bank classifies
its investments as securities available-for-sale or investments securities
held-to-maturity in accordance with SFAS No. 115. At September 30, 1998, the
Bank's investment portfolio policy allowed investments in instruments such as
U.S. Treasury obligations, U.S. federal agency or federally sponsored agency
obligations, municipal obligations, mortgage-backed securities, banker's
acceptances, certificates of deposit, federal funds, including FHLB overnight
and term deposits (up to six months), as well as investment grade corporate
bonds, commercial paper and the mortgage derivative products described below.
The Board of Directors may authorize additional investments.
The Bank's securities available-for-sale and investment securities
held-to-maturity portfolios at September 30, 1998 did not contain securities of
any issuer with an aggregate book value in excess of 10% of the Bank's equity,
excluding those issued by the United States Government or its agencies.
Mortgage-Backed Securities. To supplement lending activities, the Bank
has invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages, the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally quasi-governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, Government National Mortgage
Association ("GNMA"), and FNMA.
The Bank's mortgage-backed securities were classified as
held-to-maturity at September 30, 1998 and were all issued by GNMA or FNMA,
representing participating interests in direct pass-through pools of long-term
mortgage loans originated and serviced by the issuers of the securities.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
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<PAGE>
Investment Activities
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment securities portfolio, short term investments, FHLB
stock and mortgage-backed securities at the dates indicated.
At September 30,
--------------------------
1998 1997
--------- ----------
(In thousands)
Investment securities available for sale:
Equity Investments................................. $ 562 $ --
Federal Home Loan Bank bonds 14,630 --
------- ------
Total Investment Securities available for sale..... $ 15,192 $ --
------- ------
Investment securities held to maturity:
Federal National Mortgage Association bonds........ $ 3,750 $ 500
Federal Home Loan Bank bonds....................... 10,850 2,250
Federal Home Loan Mortgage Corporation bonds....... -- 1,000
------- ------
Total investment securities held to maturity.... 14,600 $ 3,750
------- ------
Interest-bearing deposits in other banks........... $ 9,849 $ 3,899
Federal funds sold................................. 3,394 3,482
Mortgage-backed securities......................... 7,276 2,845
FHLB stock......................................... 1,000 753
------ ------
Total .......................................... $51,311 $14,729
====== ======
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<PAGE>
The following table sets forth information regarding the scheduled
maturities, carrying values, market value and weighted average yields for the
Bank's investment securities portfolio at September 30, 1998. The following
table does not take into consideration the effects of scheduled repayments or
the effects of possible prepayments.
<TABLE>
<CAPTION>
More than One to More than Five to
One Year or Less Five Years Ten Years More than Ten Years Total Investment Securities
------------------ ----------------- ---------------- ------------------- ----------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equity Investments: ...... -- -- -- -- -- -- 562 -- 562 -- 562
Federal Home Loan Bank
bonds available for sale -- -- -- -- -- -- 14,630 6.92 14,630 6.92 14,630
Federal Home Loan Bank
bonds held to maturity . 250 6.81 -- -- -- -- 3,500 6.94 3,750 6.94 3,784
Federal National Mortgage
Association bonds
held to maturity ....... -- -- -- -- 250 7.00 10,600 6.93 10,850 6.93 10,923
Interest-bearing deposits
in other banks ......... 9,849 5.73 -- -- -- -- -- -- 9,849 5.73 9,849
Federal funds sold ....... 3,394 5.62 -- -- -- -- -- -- 3,394 5.62 3,394
Mortgage-backed securities 27 8.00 3 8.00 271 7.55 6,975 6.74 7,276 6.78 7,459
FHLB stock ............... -- -- -- -- -- -- 1,000 7.56 1,000 7.56 1,000
------ ---- --- ------ ----- ------
Total ............... 13,520 5.73 3 8.00 521 7.28 37,267 6.77 51,311 6.50 51,601
====== ==== ==== ==== === ==== ====== ==== ====== ==== ======
</TABLE>
12
<PAGE>
Sources of Funds
General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes. The Bank derives funds from amortization
and prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a selection
of deposit instruments including regular savings accounts, money market
accounts, and term certificate accounts. The Bank also offers IRA accounts.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate, among other
factors. At September 30, 1998, the Bank had no brokered accounts.
Certificates of Deposit. The following table indicates the amount of
the Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of September 30, 1998.
Certificates
of Deposits
-----------
Maturity Period (In thousands)
- ---------------
Within three months....................... $ 102
Three through six months.................. 644
Six through twelve months................. 1,897
Over twelve months........................ 3,241
-------
$ 5,884
=======
Borrowings
The Bank may obtain advances from the FHLB of Atlanta to supplement its
supply of lendable funds. Advances from the FHLB of Atlanta are typically
secured by a pledge of the Bank's stock in the FHLB of Atlanta and a portion of
the Bank's first mortgage loans and certain other assets. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The Bank, if the need arises, may also access the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. At September 30, 1998, the Bank had $20.0
million borrowings from the FHLB of Atlanta.
13
<PAGE>
<TABLE>
<CAPTION>
During the Year Ended
September 30,
---------------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding at any month end:
Advances from Federal Home Loan Bank......................... $20,000 $4,000
Approximate average short-term borrowings outstanding
with respect to:
Advances from Federal Home Loan Bank......................... $ 6,917 $2,833
Approximate weighted average rate paid on:
Advances from Federal Home Loan Bank......................... 5.63% 5.71%
</TABLE>
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. At September 30, 1998,
the Bank had investments in two service corporation, incorporated under Maryland
law.
Bankers Affiliate - BA
BA was formed in April 1983 as a service corporation for the purpose of
originating consumer loans. BA is equally owned by the Bank as other local
thrift institutions. At September 30, 1998, the Bank's investment totalled
$2,575,000 and had a loan payable from this subsidiary of $2,550,000.
Mapleleaf Mortgage Corporation - MMC
MMC was formed in June 1996 and is a wholly-owned subsidiary of the
Bank. The purpose of MMC is to engage in mortgage brokerage activities. At
September 30, 1998, the Bank's investment totalled $41,691.
Employees
At September 30, 1998, the Bank had 25 full-time and 8 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
14
<PAGE>
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
15
<PAGE>
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank declined by
approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1998, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL,
16
<PAGE>
it will continue to enjoy full borrowing privileges from the FHLB of Atlanta.
The required percentage of QTIs is 65% of portfolio assets (defined as all
assets minus intangible assets, property used by the institution in conducting
its business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be in compliance with the QTL test on a
monthly basis in nine out of every 12 months. As of September 30, 1998, the Bank
was in compliance with its QTL requirement with 86.82% of its assets invested in
QTIs.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1998, the Bank's required
liquid asset ratio was 4%.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
September 30, 1998, the Bank was in compliance with these Federal Reserve Board
requirements.
17
<PAGE>
Item 2. Description of Property
(a) Properties.
The Bank operates from its main office and four branch offices.
Location Leased or Owned
- -------- ---------------
MAIN OFFICE:
1505 York Road Owned
Lutherville, Maryland
21093
HAMILTON OFFICE:
4228 Harford Road Owned
Baltimore, Maryland 21214
WOODLAWN OFFICE:
Gwynn Oak Avenue and Leased until
Windsor Mill Road January 2002
Baltimore, Maryland 21207
ELLICOTT CITY OFFICE:
9396 Baltimore National Pike Leased until
Ellicott City, Maryland May 2000
21042
GOLDEN RING OFFICE:
8767 K Philadelphia Road Leased until
Baltimore, Maryland 21237 May 2001
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank's investments are
primarily acquired to produce income, and to a lesser extent, possible capital
gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business - Lending Activities and - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
18
<PAGE>
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which the Company or the Bank
are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Bank holds security interests, claims
involving the making and servicing of real property loans, and other issues
incident to the Bank's business. In the opinion of management, no material loss
is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Market Price of
the Common Stock" of the Company's Annual Report to Stockholders for the fiscal
year ended September 30, 1998 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
- --------------------------------------------------------------------------------
Item 8. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not applicable.
PART III
- --------------------------------------------------------------------------------
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers -
Election of Directors" and " - Biographical Information" in the "Proxy
Statement" is incorporated herein by reference.
19
<PAGE>
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
1. The consolidated statements of financial condition of
WHG Bancshares Corporation as of September 30, 1998
and 1997 and the related consolidated statements of
operations, changes in stockholders' equity and cash
flows for each of the years in the two year period
ended September 30, 1998, together with the related
notes and the independent auditors' report of
Anderson Associates, LLP independent certified public
accountants.
2. Schedules omitted as they are not applicable.
20
<PAGE>
3. The following exhibits are included in this Report or
incorporated herein by reference:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(a) List of Exhibits:
3(i) Articles of Incorporation of WHG Bancshares Corporation *
3(ii) Bylaws of WHG Bancshares Corporation *
10.1 Amendment to Employment Agreement with Peggy J. Stewart **
10.2 Restated Severance Agreement with Robin L. Taylor **
10.3 Restated Severance Agreement with Diana Rohrback **
10.4 Restated Severance Agreement with Nicholas Tracht **
10.5 Amendment to the 1996 Stock Option Plan ***
10.6 Amendment to Management Stock Bonus Plan and Trust Agreement ***
13 Annual Report to Stockholders for the fiscal year ended September 30,
1998
21 Subsidiaries of the Registrant (See Item 1 - Description of Business)
23 Consent of Anderson Associates, LLP
27 Financial Data Schedule (electronic filing only)
- ---------------------
* Incorporated by reference to the registration statement on Form S-1 (File No. 33-80487) declared
effective by the SEC on February 7, 1996.
** Incorporated by reference to the June 30, 1998 Form 10-QSB filed with the SEC on August 12,
1998.
*** Incorporated by reference to the proxy statement for the annual meeting
of stockholders filed with the SEC on or about December 19, 1997.
(b) Not applicable
</TABLE>
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized as of
December 22, 1998.
WHG BANCSHARES CORPORATION
By: /s/ Peggy J. Stewart
-----------------------------------------------
Peggy J. Stewart
President, Chief Executive Officer and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of December 22, 1998.
<TABLE>
<CAPTION>
<S> <C>
/s/ Peggy J. Stewart /s/ Robin L. Taylor
- ------------------------------------ --------------------------------------------
Peggy J. Stewart Robin L. Taylor
President, Chief Executive Officer Controller
and Director (Principal Accounting and Financial Officer)
(Principal Executive Officer)
/s/ John E. Lufburrow /s/ Herbert A. Davis
- ------------------------------------ --------------------------------------------
John E. Lufburrow Herbert A. Davis
Chairman of the Board Director
/s/ Philip W. Chase, Jr. /s/ D. Edward Lauterbach, Jr.
- ------------------------------------ --------------------------------------------
Philip W. Chase, Jr. D. Edward Lauterbach, Jr.
Director Director
/s/ Urban P. Francis, Jr. /s/ Edwin C. Muhly, Jr.
- ------------------------------------ --------------------------------------------
Urban P. Francis, Jr. Edwin C. Muhly, Jr.
Director Director
/s/ Hugh P. McCormick
- ------------------------------------ --------------------------------------------
Hugh P. McCormick Herbert W. Spath
Director Director
/s/ August J. Seifert
- ------------------------------------
August J. Seifert
Director
</TABLE>
<PAGE>
WHG BANCSHARES CORPORATION
ANNUAL REPORT
For the Fiscal Year Ended
September 30, 1998
-----------------------------------------------------------------------
<PAGE>
WHG BANCSHARES CORPORATION
ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
Letter to Stockholders............................................. 1
Corporate Profile and Stock Market Information..................... 2
Selected Financial Ratios and Other Data........................... 3
Management's Discussion and Analysis............................... 4
Independent Auditors' Report....................................... 15
Consolidated Financial Statements.................................. 16
Notes to Consolidated Financial Statements......................... 21
Office Locations and Other Corporate Information................... 52
<PAGE>
[LOGO] [WHG BANCSHARES LETTERHEAD]
To Our Stockholders:
On behalf of our Board of Directors and employees, we are pleased to
present the 1998 Annual Report to Stockholders of WHG Bancshares Corporation
(the "Company"). During 1998, measures were undertaken to enhance your
investment in the Company. These measures, which are discussed below, included
stock repurchases and the declaration of special cash distribution of $3.00 per
share. In addition, in order to increase earnings and leverage the Company's
capital, we grew our assets by more than $34 million during 1998. We did this by
purchasing bonds and mortgage- backed securities issued by FNMA, FHLMC and the
FHLB.
On July 30, 1998, we announced the declaration of a special cash
distribution of $3.00 per share, in addition to our regular quarterly dividend
of $.08 per share. Both distributions were paid on September 10, 1998, to
shareholders of record as of August 13, 1998. At that time, we estimated that
the entire amount of the $3.00 per share special distribution would be treated
as a return of capital distribution. The $3.00 return of capital would be
treated as a reduction in the cost basis of each share and would not be subject
to income tax as a dividend to our shareholders. However, a final determination
as to an exact amount of the return of capital portion of the special
distribution cannot be made until after December 31, 1998. The Board of
Directors believes this strategy is reflective of our commitment to enhance your
long-term value in our Company.
In September 1998, the Company announced plans to repurchase in the open
market up to 35,843 shares of its common stock. To date, we have repurchased
3,222 shares pursuant to this recent announcement. We have repurchased a total
of 234,282 shares of our stock since we became a public company in March 1996.
For the fiscal year ended September 30, 1998, the Company earned $680,579
or $.55 basic earnings per share, as compared to net earnings of $754,147 or
$.53 basic earnings per share for the fiscal year ended September 30, 1997. At
September 30, 1998, the Company's total assets grew by over $34 million to
$132,876,472, as compared to $98,556,719 at September 30, 1997. Stockholders'
equity at September 30, 1998 was $16,242,716 or a book value of $11.69 per
share, as compared to $19,829,133 or a book value of $14.24 per share at
September 30, 1997. Stockholders' equity decreased during 1998 primarily due to
the payment of the $3.00 special distribution to stockholders.
We believe our actions in 1998 reflect our continued commitment to
enhancing your investment in the Company.
Sincerely,
/s/ John E. Lufburrow /s/ Peggy J. Stewart
- ----------------------------------- ------------------------------------
John E. Lufburrow Peggy J. Stewart
Chairman of the Board President and CEO
1505 York Road * Lutherville, Maryland * 21093-5661
PHONE: 410-583-8700 FAX: 410-583-1863
-1-
<PAGE>
WHG BANCSHARES CORPORATION
Corporate Profile
WHG Bancshares Corporation (the "Company") is a Maryland corporation organized
in December of 1995 at the direction of Heritage Savings Bank, F.S.B. (the
"Savings Bank" or "Heritage") to acquire all of the capital stock that the
Savings Bank issued in its conversion from the mutual to stock form of ownership
(the "Conversion"). On March 29, 1996, the Savings Bank completed the Conversion
and became a wholly owned subsidiary of the Company. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage provided
that the Savings Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Savings Bank and investing the Company's portion of the net proceeds obtained in
the conversion.
The Savings Bank, founded in 1902 under the name West Baltimore Building
Association, is a federally chartered stock savings bank headquartered in
Lutherville, Maryland. The Savings Bank is subject to examination and
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). The Savings Bank is a member of and owns capital stock in the FHLB of
Atlanta, which is one of the 12 regional banks in the FHLB System. The Savings
Bank has investments in two service corporations.
The Savings Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
Stock Market Information
The Company's common stock has been traded on the Nasdaq SmallCap Market under
the trading symbol of "WHGB" since it commenced trading in April 1996. The
following table reflects high and low bid quotations as published by The Wall
Street Journal. The quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
Dividends
Date High Low Declared
---- ---- --- --------
<S> <C> <C> <C>
April 1, 1996 to June 30, 1996 $11.75 $10.75 $--
July 1, 1996 to September 30, 1996 13.00 11.00 --
October 1, 1996 to December 31, 1996 13.75 12.50 .05
January 1, 1997 to March 31, 1997 14.75 12.75 .05
April 1, 1997 to June 30, 1997 15.38 13.63 .05
July 1, 1997 to September 30, 1997 16.50 15.00 .05
October 1, 1997 to December 31, 1997 18.88 15.00 .08
January 1, 1998 to March 31, 1998 19.00 17.75 .08
April 1, 1998 to June 30, 1998 19.75 15.75 .08
July 1, 1998 to September 30, 1998 16.75 11.00 .08
</TABLE>
-2-
<PAGE>
The number of shareholders of record of common stock as of the record date of
December 4, 1998, was approximately 245. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At December 4, 1998, there were 1,385,780 shares outstanding.
The Company's ability to pay dividends to stockholders is dependent upon the
dividends it receives from the Savings Bank. The Savings Bank may not declare or
pay a cash dividend on any of its stock if the effect thereof would cause the
Savings Bank's regulatory capital to be reduced below (1) the amount required
for the liquidation account established in connection with the Conversion, or
(2) the regulatory capital requirements imposed by the OTS.
Selected Financial Ratios and Other Data
For the Years Ended
September 30,
-------------
1998 1997
---- ----
Return on average assets.......................... .57% .77%
Return on average equity.......................... 3.46 3.49
Average equity to average assets ratios........... 16.53 22.03
Equity to assets at period end.................... 12.22 20.12
Net interest rate spread.......................... 2.58 2.89
Net yield on average interest-earnings assets..... 3.27 3.82
Non-performing loans to total assets.............. .29 .85
Allowance for loan loss to total loans............ .40 .32
-3-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
WHG Bancshares Corporation (the "Company") was formed in March, 1996 by
Heritage Savings Bank, F.S.B. (the "Bank") to become the holding company of the
Bank following the stock conversion. The Company's results of operations are
primarily dependent on its net interest income, which is the difference between
the interest income earned on its assets, primarily loans and investments, and
the interest expense on its liabilities, primarily deposits and borrowings. Net
interest income may be affected significantly by general economic and
competitive conditions and policies of regulatory agencies, particularly those
with respect to market interest rates. The results of operations are also
influenced by the level of non-interest expenses, such as employee salaries and
benefits and other income, such as loan-related fees and fees on deposit-related
services.
Market Risk
Market risk is defined as the risk of loss due to adverse changes in
market rates and prices. The Bank's net interest income is sensitive to changes
in interest rates, as the rates paid on its interest-bearing liabilities
generally change faster than the rates earned on interest-earning assets. As a
result, net interest income will frequently decline in periods of rising
interest rates and increase in periods of falling interest rates.
To mitigate the impact of changing interest rates on its net interest
income, the Bank manages its interest sensitivity and asset/liability products
through a committee which meets weekly and consists of department supervisors,
overseen by the President and Chairman of the Board of Directors. The Chairman
reports to the Board of Directors of the Bank on behalf of the Committee.
In an effort to reduce interest rate risk and protect itself from the
negative effects of rapid or prolonged changes in interest rates, the Bank has
instituted certain asset and liability management measures, including the
following measures:
o Maintains a large base of adjustable rate residential mortgage
loans. Such loans have been emphasized by the Bank. However, the
Bank offers fixed rate residential mortgage loans in addition to
ARMs to balance the loan portfolio.
o Maintains interest-bearing deposits, federal funds and U.S.
Government securities with short to intermediate terms to
maturities.
o Maintains a portfolio of investments available for sale.
o Maintains a high proportion of lower-costing, non-certificate
accounts in the deposit portfolio. At September 30, 1998, such
deposits totaled $26.3 million or 27.7% of total deposits.
-4-
<PAGE>
Market Risk - Continued
The Committee manages the interest rate sensitivity of the Bank through
the determination and adjustment of asset/liability composition and pricing
strategies. The Committee then monitors the impact of the interest rate risk and
earnings consequences of such strategies for consistency with the Bank's
liquidity needs, growth and capital adequacy. The interest rates on the Bank's
liabilities generally change faster than rates earned on assets, because the
Bank's deposit liabilities consist primarily of demand, money market and
passbook savings accounts, and certificates of deposit that mature in one year
or less. The Bank seeks to mitigate the interest rate sensitivity of its
liabilities by offering higher rates on longer-term certificate accounts.
However, depositors have not sought such longer terms during recent periods. The
Bank does not currently engage in, or intend to engage in, trading activities or
use derivative instruments to control interest rate risk.
Net Portfolio Value
Management measures the Bank's interest rate risk by computing amounts
by which the net present value of the Bank's cash flows from assets, liabilities
and off balance sheet items (net portfolio value or "NPV") would change in the
event of a range of assumed changes in market interest rates. These computations
estimate the effect on the Bank's NPV from instantaneous and permanent 1% to 4%
(100 to 400 basis points) increases and decreases in market interest rates.
Based upon OTS assumptions, the following table presents the Bank's NPV at
September 30, 1998.
Changes NPV
in Rate Ratio(1) Change(2)
------- -------- ---------
+400 bp 10.39% -1070 bp
+300 bp 13.20% -789 bp
+200 bp 15.96% -513 bp
+100 bp 18.59% -250 bp
0 bp 21.09% 0
-100 bp 23.34% +225 bp
-200 bp 25.67% +458 bp
-300 bp 28.23% +714 bp
-400 bp 30.82% +973 bp
- ----------------------
(1) Calculated as the estimated NPV divided by present value of assets.
(2) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
-5-
<PAGE>
Net Portfolio Value - Continued
These calculations indicate that the Bank's net portfolio value could
be adversely affected by increases in interest rates but could be favorably
affected by decreases in interest rates. In addition, the Bank would be deemed
to have more than a normal level of interest rate risk under applicable
regulatory capital requirements.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Average Balance Sheet
The following table sets forth information relating to the Company's
average balance sheet and reflects the average yield on assets and average costs
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management believes that the use of month-end balances is
representative of operations.
-6-
<PAGE>
Average Balance Sheet - Continued
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable(1)............................ $ 77,911 $ 6,012 7.72% $ 78,643 $ 5,912 7.52%
Investment securities(2)....................... 22,247 1,440 6.47% 4,995 392 7.85%
Mortgage-backed securities..................... 5,091 342 6.72% 2,937 199 6.78%
Other interest-earning assets(3)............... 10,726 645 6.01% 9,292 547 5.89%
-------- ------- ------- ------
Total interest-earning assets............... $ 115,975 $ 8,439 7.28% $ 95,867 $ 7,050 7.35%
======== ====== ======= ======
Non-interest-earning assets....................... 3,086 2,124
-------- -------
Total assets................................ $ 119,061 $ 97,991
======== =======
Interest-bearing liabilities:
Demand deposits................................ $ 26,764 $ 738 2.76% $ 27,661 $ 766 2.77%
Time deposits.................................. 58,046 3,201 5.52% 44,639 2,454 5.50%
Other liabilities(4)........................... 14,234 713 5.01% 3,651 168 4.60%
-------- ------ ------- -------
Total interest-bearing liabilities.......... 99,044 $ 4,652 4.70% 75,951 $ 3,388 4.46%
====== ======
Non-interest bearing liabilities.................. 333 454
-------- -------
Total liabilities........................... 99,377 76,405
Stockholders' equity.............................. 19,684 21,586
-------- -------
Total liabilities and stockholders' equity.. $ 119,061 $ 97,991
======== ======
Net interest income............................... $ 3,787 $ 3,662
====== ======
Interest rate spread(5)........................... 2.58% 2.89%
====== ======
Net yield on interest-earning assets(6)........... 3.27% 3.82%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities.......... 117.09% 126.22%
====== ======
</TABLE>
- ---------------------------
(1) Average balances include non-accrual loans.
(2) Includes available for sale securities, other investments held to maturity,
ground rents and FHLB stock.
(3) Includes Federal Funds, interest-bearing deposits in other financial
institutions and interest-earning loans to affiliated corporations.
(4) Includes FHLB advances and interest-earning advance payments by borrowers
for taxes and insurance.
(5) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
-7-
<PAGE>
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of the Company's
interest-earning assets and interest-bearing liabilities. The table
distinguishes between (i) changes in net income attributable to volume (changes
in volume multiplied by the prior period's interest rate), (ii) changes in net
interest income attributable to rate (changes in interest rates multiplied by
the prior period's volume), and (iii) changes in volume multiplied by changes in
rates.
Year Ended September 30,
------------------------------------
1998 vs. 1997
------------------------------------
Increase (Decrease)
Due to
------------------------------------
Rate/
Volume Rate Volume Net
------ ------ ------- -----
(Dollars in Thousands)
Interest income:
Loans receivable ................... $ (55) $ 156 $ (1) $ 100
Investment securities............... 1,354 (69) (237) 1,048
Mortgage-backed securities.......... 146 (2) (1) 143
Other interest earning assets....... 84 12 2 98
----- ----- ---- -----
Total interest-earning assets.... 1,529 97 (237) 1,389
Interest expense:
Deposits............................ 557 138 24 719
Other liabilities(1)................ 487 15 43 545
----- ----- ---- -----
Total interest-bearing
liabilities..................... 1,044 153 67 1,264
----- ----- ---- -----
Net change in net interest income...... $ 485 $ (56) $(304) $ 125
===== ===== ===== =====
(1) Includes interest on advances from the FHLB of Atlanta and advance payments
by borrowers for taxes and insurance.
-8-
<PAGE>
Financial Condition
Total assets of the Company were $132.9 million at September 30, 1998
compared to $98.6 million at September 30, 1997, an increase of $34.3 million or
34.8%. This increase was primarily due to increases in interest-bearing deposits
in other banks of $6.0 million, investments available for sale of $15.2 million,
other investments held to maturity of $10.8 million and mortgage backed
securities of $4.4 million. These increases were off-set slightly by a decrease
in loans receivable of $3.1 million. The increases were the results of
management's strategy to maximize the high level of equity, diversify the
Company's balance sheet and increase profitability. Loan payments and repayments
exceeded new loan originations by $3.1 million during the fiscal year due to a
highly competitive loan market and management decision to diversify.
The Company's deposits increased by $20.9 million or 28.2% to $95.1
million at September 30, 1998 from $74.2 million at September 30, 1997. The
increase was a result of a $21.4 million increase in certificates of deposit,
due to an advertising campaign by management focusing on two and five year
step-up certificates of deposit. The increase was slightly off-set by decreases
in transaction and passbook accounts. Borrowings increased by $16.9 million as
management took advantage of favorable borrowing rates.
The Company's net worth decreased by $3.6 million to $16.2 million at
September 30, 1998 from $19.8 million at September 30, 1997. The decrease was
primarily due to a special cash distribution to shareholders in aggregate amount
of $4.2 million ($3.00 per share) in July 1998, an increase in common stock
dividends paid, partially off-set by fiscal 1998's net income.
Results of Operations
Net Income
Net income decreased by $73,000 for the fiscal 1998 to $681,000 from
$754,000 for fiscal 1997. The decrease was the result of increases in
non-interest expense of $280,000 and the provision for loan losses of $134,000.
This was substantially off-set by an increase in net interest income of $125,000
and non-interest income of $175,000 and a decrease in the provision for income
taxes of $41,000 all of which is explained in more detail below.
Net Interest Income
Net interest income increased by approximately $125,000 to $3.8 million for
fiscal 1998 from $3.7 million for fiscal 1997. The increase was the result of an
increase in the amount of average interest-earning assets exceeding average
interest-bearing liabilities. (See Rate/Volume Analysis Table)
The interest rate spread, which is the difference between the yield on
average interest-earning assets and the percentage cost of average
interest-bearing liabilities, decreased in fiscal 1998 to 2.58% from 2.89% for
fiscal 1997. The decrease in interest rate spread is primarily the result of a
decline in the average yield on investment securities combined with increase in
average cost of borrowings.
-9-
<PAGE>
Results of Operations - Continued
Interest Income
Interest income on loans increased by approximately $100,000 to $6.0
million for fiscal 1998 from $5.9 million for fiscal 1997. The increase was due
to an increase in the average yield on loans of 20 basis points to 7.72%
compared to 7.52% for fiscal 1997. This was off-set slightly by a decrease in
the average dollar amount of loans outstanding in fiscal 1998 over fiscal 1997
of approximately $732,000.
Interest and dividend income on investment securities increased by
$1,048,000 or 267.3% to $1,440,000 in fiscal 1998 from $392,000 in fiscal 1997.
The increase was the result of an increase in the average dollar amount of
investment securities outstanding of $17.3 million, partially off-set by a
decrease in the average yield of 138 basis points to 6.47% for fiscal 1998 from
7.85% for fiscal 1997.
Interest income on mortgage backed securities increased by $143,000 or
71.9% to $342,000 for fiscal 1998 from $199,000 for fiscal 1997. The increase
was primarily due to an increase of $2.2 million or 75.9% in the average dollar
amount outstanding.
The above increases in the average balances were due primarily to
management's strategy to diversify the balance sheet as discussed in the
Financial Condition section herein.
Other interest income increased by $98,000 or 17.99% to $645,000 in
fiscal 1998 from $547,000 in fiscal 1997. The increase was due to the increase
in the average dollar amount invested in other interest-earning assets of $1.4
million combined with a 12 basis point increase in the average yield. Other
interest-earning assets consist of federal funds sold, interest-bearing deposits
in other banks, securities purchased under agreement to resell, FHLB stock and a
loan to affiliated corporation.
Interest on Deposits
Interest on deposits increased by $720,000 or 22.4% to $3,940,000 in
fiscal 1998 from $3,220,000 in fiscal 1997. The increase was primarily due to an
increase of $12.5 million or 17.3% in the average dollar amount outstanding,
combined with an increase in the average cost of these funds to 4.64% in fiscal
1998 from 4.45% in fiscal 1997.
Interest on short-term borrowings increased $357,000 or 212.5% to
$525,000 in fiscal 1998 from $168,000 in fiscal 1997. The increase was due to
the Bank using FHLB advances as an additional funding source as part of
management diversification strategy of the balance sheet. This increased the
average amount of borrowings by $10,583,000 and rates paid by 41 basis points.
-10-
<PAGE>
Results of Operations - Continued
Provision for Loan Losses
The provision for loan losses for fiscal 1998 was increased by $134,000
to $195,000 from $61,000 for fiscal 1997. During fiscal 1998, two borrowers
experienced financial difficulties that required the properties to be sold at
foreclosure sales. This resulted in the Bank experiencing net charge-offs of
$144,000 as compared to $6,000 during fiscal 1997. The charge-offs in fiscal
1998 resulted in management reevaluating the allowance for loan losses. Based
upon the additions to the allowance for loan losses, management believes the
allowance for loan losses is adequate. However, there can be no assurance that
the allowance for loan losses will be adequate to cover significant losses that
the Bank might incur in the future.
Non-Interest Income
Non-interest income increased $175,000 or 72.9% to $415,000 for fiscal
1998 from $240,000 for fiscal 1997. The increase was the result of the Bank's
subsidiary Mapleleaf Mortgage Corporation ("MMC") increasing its mortgage
brokerage operation's activities with third parties.
Non-Interest Expenses
Non-interest expenses increased $280,000 or 10.8% to $2,867,000 for
fiscal 1998 from $2,587,000 for fiscal 1997. Salaries and related expenses
increased $165,000 or 10.0% to $1,817,000 for fiscal 1998 from $1,652,000 for
fiscal 1997. Salaries and related expenses increased as a result of increased
compensation to MMC employees as the result of increased activity and an
increase in non-cash compensation under stock-based benefit plans resulting from
an increase in the average stock price.
Occupancy expense decreased $20,000 or 12.4% to $141,000 for fiscal 1998
from $161,000 is fiscal 1997. The decrease was primarily due to a decrease in
repairs and maintenance.
The Savings Association Insurance Fund ("SAIF") deposit insurance
premiums decreased by approximately $20,000 to $48,000 for fiscal 1998 from
$68,000 in fiscal 1997. The Savings Bank's premiums were reduced from .23% of
insured deposits to .064% as of January 1, 1997.
Depreciation of equipment expense increased $15,000 or 31.3% to $63,000
for fiscal 1998 from $48,000 for fiscal 1997. The increase for fiscal 1998 was
the result of the purchase of additional equipment during fiscal 1998.
-11-
<PAGE>
Results of Operations - Continued
Non-Interest Expenses - Continued
Advertising expense increased by $54,000 or 101.9% to $107,000 for fiscal
1998 from $53,000 for fiscal 1997. During fiscal 1998, the Bank conducted an
aggressive advertising campaign for loans and deposits.
Data processing costs increased $11,000 or 14.3% to $88,000 in fiscal
1998 from $77,000 in fiscal 1997. The increase was the result of an increase in
data processing services and an increase in the number of deposit accounts.
Other expenses increased by approximately $70,000 or 22.2% to $386,000
for fiscal 1998 from $316,000 in fiscal 1997. The increase in fiscal 1998 was
primarily due to an increase in stationery, printing and office supplies,
liability insurance, ATM expense and miscellaneous expenses.
During fiscal 1998, the Company adopted a Year 2000 Compliance Plan
(the "Plan") and established a Year 2000 Compliance Committee (the "Committee").
The objectives of the Plan and the Committee are to prepare the Company for the
new millennium. As recommended by the Federal Financial Institutions Examination
Council, the Plan encompasses the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. These phases will enable the Company
to identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be Year 2000 ready. Execution of
the Plan is currently on target. The Company is currently in Phase 4,
Validation, which includes testing and verifications of corrective actions.
Concurrently, the Company is also addressing some issues related to subsequent
phases. Prioritization of the most critical applications has been addressed,
along with contract and service agreements. The primary operating software for
the Company is obtained and maintained by an external provider of software (the
"External Provider"). The Company has maintained ongoing contact with this
vendor so that modification of the software for Year 2000 readiness is a top
priority and the testing Phase was completed in August of 1998. The Company has
contacted all other material vendors and suppliers regarding their Year 2000
state of readiness. Each of these third parties has delivered written assurance
to the Company that they expect to be Year 2000 compliant prior to the Year
2000. The Company is in the process of contacting all material customers and
non-information technology suppliers (i.e. utility systems, telephone systems
and security systems) regarding their Year 2000 state of readiness. The next
Phase, the Implementation Phase, is to certify that systems are Year 2000 ready,
along with assurances that any new systems are compliant on a going-forward
basis. The Implementation Phase is targeted for completion by September 30,
1999.
-12-
<PAGE>
Results of Operations - Continued
Non-Interest Expenses - Continued
Costs will be incurred due to the replacement of non-compliant teller
hardware and software. The Company does not anticipate that the related overall
costs will be material in any single year. In total, the Company estimates that
its cost for compliance will amount to approximately $186,000, employee time not
included. No assurance can be given that the Year 2000 Compliance Plan will be
completed successfully by the Year 2000, in which event the Company could incur
significant costs. If the External Provider is unable to resolve the potential
problem in time, the Company would likely experience significant data processing
delays, mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial statements of the Company.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
Company's External Provider, testing plans, and all vendors, suppliers and
customer readiness.
Contingency Plan
The Bank is currently developing a contingency plan (the "Plan")
specific to the Year 2000. The Plan will address the actions that would be
undertaken if critical business functions cannot be carried out in the normal
manner upon entering the next century due to computer system or supplier
failure. If such events occur, the Bank will input a manual posting plan that
will entail manual postings of transactions to the general ledger and hand
calculations of interest for both savings accounts and mortgages as well as the
calculations of dividends. The Bank has a number of employees who have been
employed by the Bank for at least 25 years who have experience in the manual
postings to the general ledger as well as the hand calculations of interest and
dividends. The Bank is currently devising a training program for all essential
personnel. Additionally, the Bank will have management personnel on site at each
office on the first business day of the Year 2000 to answer any concerns the
customer may have and offer any assistance to the Bank's employees.
Provision for Income Taxes
Provision for income taxes decreased by approximately $41,000 or 8.2% to
$460,000 for fiscal 1998 from $501,000 for fiscal 1997. The decrease was
primarily the result of a decrease in pretax income.
Liquidity and Capital Resources
The Company is required by OTS regulations to maintain, for each
calendar month, a daily average balance of cash and eligible liquid investments
of not less than 4% of the average daily balance of its net withdrawable savings
and borrowings (due in one year or less) during the preceding calendar month.
This liquidity requirement may be changed from time to time by the OTS to any
amount within the range of 4% to 10%. The Bank's average liquidity ratio was
12.1% and 9.79% at September 30, 1998 and 1997, respectively.
-13-
<PAGE>
Results of Operations - Continued
Liquidity and Capital Resources - Continued
The Company's sources of liquidity have historically included income
earned from operations, principal and interest payments and prepayments on loans
and securities, maturities of investment securities, deposit inflows and
borrowings from the FHLB of Atlanta.
Net cash provided by operating activities was $563,000 and $724,000 for
fiscal 1998 and 1997. Cash flows from operations in fiscal 1998 decreased from
fiscal 1997 primarily due to an increase in accrued interest receivable, prepaid
and refundable income taxes and other assets as well as a decrease in net
income. This was off-set in part by an increase in the provision for loan losses
and an increase in other liabilities in fiscal 1998 as compared to a decrease in
fiscal 1997.
Net cash used by investment activities for fiscal 1998 totaled $27.3
million, a significant increase from $1.6 million for fiscal 1997. The increase
in cash used was due to management's decision to maximize the high level of
capital and also diversify the company. This is evidenced by the purchase of
investments available for sale of $26.7 million, investments held to maturity of
$22.5 million and mortgage backed securities of $4.9 million. The company
received proceeds from sales and maturities of investments available for sale
and investments held to maturity of $11.4 million and $11.6 million,
respectively. Principal repayments on loans exceeded loan originations by $3.1
million.
The Company primarily originates loans for its own portfolio and does
not sell loans to secondary market participants such as Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), but does occasionally sell loans to other financial institutions. The
Company may in the future sell loans to secondary market participants.
Net cash provided by financing activities for fiscal 1998 totaled $33.2
million compared to $1.6 million in fiscal 1997. During fiscal 1998 this was the
result of a net increase in deposits of $20.9 million, and an increase in
borrowings of $16.9 million. This was offset slightly by a return of capital in
the amount of $4.2 million and dividends paid of $410,000.
Management believes it has ample cash flows and liquidity to meet its
loan commitments of $1.1 million and unused lines of credit of $1.6 million at
September 30, 1998. The Bank has the ability to reduce its commitments for new
loan originations, adjust other cash outflows, and borrow from the FHLB of
Atlanta, or others, should the need arise.
The Bank is subject to federal regulations that impose certain minimum
capital requirements. At September 30, 1998, the Bank had risk-based capital of
$16.6 million compared to its requirement of $4.5 million, an excess of $12.1
million. Each of the Bank's tangible and core capital was $16.4 million at
September 30, 1998, compared to the requirements of $2.0 million for tangible
capital and $4.0 million for core capital. See Note 13 to the Consolidated
Financial Statements.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to the
savings and loan industry and similar matters. Management monitors projected
liquidity needs and determines the level desirable, based in part on the Bank's
commitments to make loans and management's assessment of the Bank's ability to
generate funds.
-14-
<PAGE>
ANDERSON ASSOCIATES, LLP
CERTIFIED PUBLIC ACCOUNTANTS
7621 Fitch Lane
Baltimore, Maryland 21236
410-882-8050
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Stockholders and Board of Directors
WHG Bancshares Corporation
Lutherville, Maryland
We have audited the consolidated statements of financial condition of
WHG Bancshares Corporation and Subsidiaries as of September 30, 1998 and 1997,
and the related consolidated statements of operations, retained earnings and
cash flows for each of the two years in the two year period ended September 30,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WHG
Bancshares Corporation and Subsidiaries at September 30, 1998 and 1997, and the
consolidated results of its operations and cash flows for each of the two years
in the two year period ended September 30, 1998, in conformity with generally
accepted accounting principles.
/s/ Anderson Associates LLP
December 10, 1998
Baltimore, Maryland
-15-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
---- ----
Assets
------
<S> <C> <C>
Cash $ 1,179,349 $ 1,003,528
Interest bearing deposits in other banks 9,849,431 3,898,946
Federal funds sold 3,394,000 3,481,833
Investments available for sale (Note 2) 15,191,491 -
Other investments held to maturity (Note 3) 14,600,000 3,750,000
Mortgage backed securities (Note 4) 7,275,803 2,845,210
Loans receivable - net (Note 5) 75,357,978 78,450,370
Accrued interest receivable - loans 365,022 374,561
- investments 581,865 69,230
- mortgage backed securities 40,979 15,998
Premises and equipment - net (Note 8) 876,926 721,932
Federal Home Loan Bank of Atlanta stock, at cost (Note 6) 1,000,000 753,200
Investment in and loans to affiliated corporation (Note 7) 2,575,000 2,925,000
Deferred income taxes (Note 14) 170,695 116,394
Prepaid and refundable income taxes 131,353 -
Other assets 286,580 150,517
----------- ----------
Total assets $132,876,472 $98,556,719
=========== ==========
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 9) $ 95,065,922 $74,186,112
Checks outstanding in excess of bank balance 11,077 -
Borrowings (Note 10) 20,937,168 4,000,000
Advance payments by borrowers for taxes and insurance 314,125 330,671
Income taxes payable (Note 14) 16,780 64,284
Other liabilities 288,684 146,519
------------ ----------
Total liabilities 116,633,756 78,727,586
Commitments and contingencies (Notes 5, 8, 10 and 11)
Stockholders' Equity (Notes 12 and 13)
Common stock .10 par value; authorized 1,620,062
shares; issued and outstanding 1,389,002 shares in
1998 and 1,392,415 shares in 1997 138,900 139,241
Additional paid-in capital 7,392,663 11,390,312
Retained earnings (substantially restricted) 9,651,860 9,381,773
Net unrealized losses on investments available for sale (25,140) -
------------- -----------
17,158,283 20,911,326
Employee Stock Ownership Plan (915,567) (1,082,193)
------------- ----------
Total stockholders' equity 16,242,716 19,829,133
------------- ----------
Total liabilities and stockholders' equity $132,876,472 $98,556,719
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-16-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Interest and fees on loans (Note 5) $6,011,855 $5,911,569
Interest and dividends on investment securities 1,440,571 391,584
Interest on mortgage backed securities 342,341 199,192
Other interest income 644,730 547,182
---------- ---------
Total interest income 8,439,497 7,049,527
Interest on deposits (Note 9) 3,939,755 3,219,849
Interest on short-term borrowings 525,449 167,538
Interest on long-term borrowings 187,171 -
---------- ----------
Total interest expense 4,652,375 3,387,387
--------- ----------
Net interest income 3,787,122 3,662,140
Provision for loan losses (Note 5) 195,000 60,644
---------- -----------
Net interest income after provision for loan losses 3,592,122 3,601,496
Non-Interest Income
Gain on sale of investments 7,325 -
Other commissions and fees 282,704 111,550
Fees and charges on loans 27,591 32,173
Fees on transaction accounts 63,003 55,194
Other income 34,764 41,167
--------- -----------
Total non-interest income 415,387 240,084
Non-Interest Expenses
Salaries and related expenses 1,816,659 1,651,615
Occupancy 140,648 160,616
SAIF deposit insurance premium 48,159 67,822
Depreciation of equipment 62,915 48,473
Advertising 107,476 52,743
Data processing costs 88,248 77,049
Professional services 216,559 211,848
Other expenses 386,374 316,433
---------- ---------
Total non-interest expenses 2,867,038 2,586,599
--------- ---------
Income before tax provision 1,140,471 1,254,981
Provision for income taxes (Note 14) 459,892 500,834
---------- ----------
Net income $ 680,579 $ 754,147
========== ==========
Basic earnings per share $ .55 $ .53
========== ==========
Diluted earnings per share $ .51 $ .51
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-17-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
-------------------------------------------
<TABLE>
<CAPTION>
Net
Unrealized Losses Employee
Additional on Investments Stock Total
Common Paid-In Retained Available Ownership Stockholders'
Stock Capital Earnings for Sale Plan Equity
----- ------- -------- -------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Balance - September 30, 1996 $162,006 $15,403,857 $8,911,434 $ - $(1,231,240) $23,246,057
Purchase of 227,647 shares of common stock (22,765) (3,347,408) - - - (3,370,173)
Compensation under Stock-Based Benefit Plan - 64,572 - - 149,047 213,619
Deferred compensation -
Management Stock Bonus Plan - (882,927) - - - (882,927)
Compensation under Stock Bonus Plan - 152,218 - - - 152,218
Dividends paid ($.20 per share) - - (283,808) - - (283,808)
Net income - - 754,147 - - 754,147
------- ---------- --------- --------- ---------- ---------
Balance - September 30, 1997 139,241 11,390,312 9,381,773 - (1,082,193) 19,829,133
Purchase of 3,413 shares of common stock (341) (53,413) - - - (53,754)
Compensation under Stock Bonus Plan - 158,477 - - - 158,477
Compensation under Stock-Based Benefit Plan - 64,293 - - 166,626 230,919
Net unrealized holding losses on available for
sale securities - - - (25,140) - (25,140)
Dividends paid ($.32 per share) - - (410,492) - - (410,492)
Special distribution ($3.00 per share) - (4,167,006) - - - (4,167,006)
Net income - - 680,579 - - 680,579
------- ----------- --------- --------- ---------- ----------
Balance - September 30, 1998 $138,900 $ 7,392,663 $9,651,860 $ (25,140) $ (915,567) $16,242,716
======= =========== ========= ========= ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-18-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities
- --------------------
Net income before other comprehensive income $ 680,579 $ 754,147
Gain on sale of investment available for sale (7,325) -
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities
-------------------------------------
Net accretion/amortization of premiums and discounts
of mortgage backed securities 371 (826)
Amortization of deferred loan fees (183,240) (170,241)
Loan fees deferred 165,963 105,511
Decrease in discount on loans purchased (21,177) (20,560)
Provision for loan losses 195,000 60,644
Non-cash compensation under stock-based
benefit plans 389,396 365,837
Increase in accrued interest receivable (528,077) (6,212)
Provision for depreciation 82,404 66,782
Decrease (increase) in deferred income taxes (38,483) 162,393
Increase in prepaid and refundable income taxes (131,353) -
Decrease (increase) in other assets (136,063) 56,097
Decrease in accrued interest payable (77) (1,580)
Decrease in income taxes payable (47,504) (173,172)
(Decrease) increase in other liabilities 142,165 (474,900)
------------ ----------
Net cash provided by operating activities 562,579 723,920
Cash Flows from Investment Activities
- -------------------------------------
Proceeds from maturing interest-bearing deposits 437,679 783,000
Purchases of interest-bearing deposits - (437,679)
Decrease in securities purchased under
agreement to resell - 2,000,000
Proceeds from sales and maturities of investments
available for sale 11,434,712 -
Purchase of investments available for sale (26,659,836) -
Proceeds from maturing other investments - held
to maturity 11,600,000 2,000,000
Purchase of other investments - held to maturity (22,450,000) (3,250,000)
Purchase of mortgage backed securities (4,936,300) -
Principal collected on mortgage backed securities 505,336 177,614
Net decrease (increase) in shorter term loans 40,194 (119,079)
Loans purchased (224,480) -
Longer term loans originated or acquired (13,530,622) (11,963,341)
Principal collected on longer term loans 16,650,754 9,393,482
Investment in premises and equipment (237,398) (54,271)
Purchase of stock in Federal Home Loan Bank of Atlanta (246,800) (70,400)
(Increase) decrease on investment in and
loans to joint ventures 350,000 (100,000)
------------- ------------
Net cash used by investment activities (27,266,761) (1,640,674)
</TABLE>
-19-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Financing Activities
Net decrease in demand deposits, money
market, passbook accounts and advances by
borrowers for taxes and insurance $ (540,191) $(1,130,148)
Net increase in certificates of deposit 21,403,532 3,225,329
Increase in checks outstanding in excess of
bank balance 11,077 -
Borrowings 16,937,168 4,000,000
Special distribution (4,167,006) -
Stock repurchase (53,754) (3,370,173)
Stock purchased for Management Stock Bonus Plan - (882,927)
Dividends (410,492) (283,808)
------------ ----------
Net cash provided by financing activities 33,180,334 1,558,273
----------- ----------
Increase in cash and cash equivalents 6,476,152 641,519
Cash and cash equivalents at beginning of year 7,946,628 7,305,109
----------- ----------
Cash and cash equivalents at end of year $14,422,780 $ 7,946,628
========== ==========
The following is a Summary of Cash and Cash Equivalents:
- --------------------------------------------------------
Cash $ 1,179,349 $ 1,003,528
Interest bearing deposits in other banks 9,849,431 3,898,946
Federal funds sold 3,394,000 3,481,833
---------- ----------
Balance of cash items reflected on
Statement of Financial condition 14,422,780 8,384,307
Less - certificates of deposit with original maturities
of more than three months that are included
in interest bearing deposits in other banks - 437,679
---------- ---------
Cash and cash equivalents reflected on the
Statement of Cash Flows $14,422,780 $ 7,946,628
========== =========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 4,552,437 $ 3,388,967
========== =========
Taxes $ 715,651 $ 420,714
========== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-20-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
-------------------------------------------
Lutherville, Maryland
---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1998
------------------
Note 1 - Summary of Significant Accounting Policies
-----------------------------------------
A. Principles of Consolidation - The consolidated financial statements
include the accounts of WHG Bancshares Corporation ("the Company") and
its wholly-owned subsidiary, Heritage Savings Bank, FSB ("the Bank")
and the Bank's subsidiary, Mapleleaf Mortgage Corporation. All
intercompany accounts and transactions have been eliminated in the
accompanying consolidated financial statements.
B. Business - The Bank's primary business activity is the acceptance of
deposits from the general public and using the proceeds for
investments and loan originations. The Bank is subject to competition
from other financial institutions. The Bank is subject to the
regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities.
C. Basis of Financial Statement Presentation - The consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from those
estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the
allowance for loan losses and the valuation of foreclosed real estate.
See Note G & H below for a discussion of the determination of that
estimate.
D. Federal Funds - Federal funds sold are carried at cost which
approximates market.
E. Investments and Mortgage Backed Securities - Non-equity investments
and mortgage backed securities will be held to maturity and,
accordingly, are carried at amortized cost since management has the
ability and intention to hold them to maturity. Amortization of
premiums and accretion of discounts on purchases is computed using the
interest method, since management had the ability and intention to
hold them to maturity. Gains and losses are determined using the
specific identification method.
F. Loans Receivable - Net - Loans receivable are stated at unpaid
principal balances, less undisbursed portion of loans in process,
unamortized discounts on loans purchased, deferred loan origination
fees and the allowance for loan losses, since management has the
ability and intention to hold them to maturity.
-21-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------------------
F. Loans held for sale are carried at the lower of cost or estimated
market value, determined in the aggregate. In computing cost, deferred
loan origination fees are deducted from the principal balances of the
related loans. There were no loans held for sale at September 30, 1998
and 1997.
The Bank services loans for others and pays the participant its share
of the Bank's collections, net of a stipulated servicing fee. Loan
servicing fees are credited to income when earned and servicing costs
are charged to expense as incurred.
G. Allowance for Loan Losses - An allowance for loan losses is provided
through charges to income in an amount that management believes will
be adequate to absorb losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem
loans, and current economic conditions that may affect the borrowers'
ability to pay. Determining the amount of the allowance for loan
losses requires the use of estimates and assumptions, which is
permitted under generally accepted accounting principles. Actual
results could differ significantly from those estimates. Management
believes the allowance for losses on loans is adequate. While
management uses available information to estimate losses on loans,
future additions to the allowances may be necessary based on changes
in economic conditions, particularly in the State of Maryland. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for
losses on loans. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination.
Statement of Financial Accounting Standards ("SFAS") No. 114, as
amended by SFAS No. 118, addresses the accounting by creditors for
impairment of certain loans. It is generally applicable for all loans
except large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment, including residential mortgage
loans and consumer installment loans. It also applies to all loans
that are restructured in a troubled debt restructuring involving a
modification of terms. SFAS No. 114 requires that impaired loans be
measured
-22-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------------------
G. based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such
that collection of interest is doubtful. When a payment is received on
a loan on non-accrual status, the amount received is allocated to
principal and interest in accordance with the contractual terms of the
loan.
Loan origination fees and certain direct loan origination costs are
deferred and are recognized by the interest method over the
contractual life of the related loan as an adjustment of yield.
Premiums and discounts on loans purchased are recognized in income
over the estimated life of the related loans using the level yield
method.
H. Foreclosed Real Estate - Real estate acquired through or in the
process of foreclosure is recorded at the lower of cost or fair value.
Management periodically evaluates the recoverability of the carrying
value of the real estate acquired through foreclosure using estimates
as described under the caption "Allowance for Loan Losses". In the
event of a subsequent decline, management provides an additional
allowance to reduce real estate acquired through foreclosure to fair
value less estimated disposal cost. Expenses incurred on foreclosed
real estate prior to disposition are charged to expense. Gains on the
sale of foreclosed real estate are recognized upon disposition of the
property.
-23-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
I. Premises and Equipment - Premises and equipment are carried at cost
less accumulated depreciation. Depreciation and amortization of
premises and equipment are accumulated by the use of the straight-line
method over the estimated useful lives of the assets. Additions and
improvements are capitalized, and charges for repairs and maintenance
are expensed when incurred. The related cost and accumulated
depreciation are eliminated from the accounts when an asset is sold or
retired and the resultant gain or loss is credited or charged to
income.
J. Investment In and Loans To Affiliated Corporation - Investments in and
loans to affiliated corporation represents common stock owned and
advances to a company formed for the purpose of making consumer
installment loans. The Bank has a 33-1/3% interest in this company and
its proportionate share of income or losses has not been recorded on
the equity method, since such amounts are not material to the
accompanying consolidated financial statements. The Bank is using the
cost method of accounting to record this investment. (See Note 7)
K. Defined Benefit Pension Plan - The Bank accounts for its Pension Plan
in accordance with Statement of Financial Accounting Standards No. 87.
Funding is limited to amounts that are available for deduction under
the Internal Revenue Code (See Note 11).
L. Employee Stock Ownership Plan - The Company accounts for its Employee
Stock Ownership Plan ("ESOP") in accordance with Statement of Position
93-6 of the Accounting Standards Division of the American Institute of
Certified Public Accountants. (See Note 12)
M. Stock-Based Compensation - SFAS No. 123, "Accounting for Stock-Based
Compensation" defines a "fair value based method" of accounting for an
employee stock option whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period. FASB encourages all entities to adopt the fair value
based method, however, it will allow entities to continue the use of
the "intrinsic value based method" prescribed by Accounting Principles
Board ("APB") Opinion No. 25. Management decided to continue using the
"intrinsic value based method" as prescribed by APB Opinion No. 25.
(See Note 12)
-24-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
N. Income Taxes - Deferred income taxes are recognized for temporary
differences between the financial reporting basis and income tax basis
of assets and liabilities based on enacted tax rates expected to be in
effect when such amounts are realized or settled. Deferred tax assets
are recognized only to the extent that is more likely than not that
such amounts will be realized based on consideration of available
evidence. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
O. Statement of Cash Flows - In the statement of cash flows, cash and
equivalents include cash, Federal Home Loan Bank of Atlanta overnight
deposits, federal funds and certificates of deposit with a maturity
date less than ninety days.
P. Basic and Diluted Earnings Per Share - The Company has adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" in 1998. This Standard establishes revised standards for
computing and presenting earnings per share data ("EPS"). It requires
dual presentation of "basic" and "diluted" EPS on the face of the
statements of income and a reconciliation of the numerators and
denominations used in the calculation of the "basic" and "diluted"
EPS. Prior years' EPS have been restated to conform to the new
standards.
Basic EPS is computed by dividing net income by the weighted average
number of common shares outstanding for the appropriate period.
Unearned ESOP shares are not included in outstanding shares. Diluted
EPS is computed by dividing net income by the weighted average shares
outstanding as adjusted for the dilutive effect of stock options and
unvested stock awards based on the "treasury stock" method.
Information relating to the calculation of net income per share of
common stock is summarized for the years ended September 30, as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $ 680,579 $ 754,147
========= =========
Weighted Average Shares
Outstanding basic EPS 1,233,797 1,425,308
Dilutive Items
Stock options 57,983 9,352
Unvested stock awards 53,750 64,802
--------- ---------
Adjusted weighted average shares
used for dilutive EPS 1,345,530 1,499,462
========= =========
</TABLE>
-25-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Q. Reclassification - Certain prior years' amounts have been reclassified
to conform to the current year's method of presentation.
Note 2 - Investments Available for Sale
------------------------------
The amortized cost and fair values of investments available for sale at
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Equity investments $ 727,448 $ - $165,823 $ 561,625
Federal Home Loan
Bank - Bonds 14,505,000 124,886 - 14,629,866
---------- ------- -------- ----------
$15,232,448 $124,866 $165,823 $15,191,491
========= ======= ======= ==========
</TABLE>
During the year ended September 30, 1998, the Company received proceeds of
$5,184,712 from the sale of investments that resulted in gross gains of $13,718
and gross losses of $6,393. No gross gains or losses were realized during the
year ended September 30, 1997.
The equity investments have no stated maturity and all of the Federal Home
Loan Bank Bonds have a stated maturity date of ten years or more.
Note 3 - Other Investments - Held to Maturity
------------------------------------
The amortized cost and fair values of other investments are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ----------- -----------
September 30, 1998
------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association Bonds $ 3,750,000 $ 37,304 $ 3,611 $ 3,783,693
Federal Home Loan
Bank Bonds 10,850,000 74,169 1,000 10,923,169
---------- --------- ------ ----------
$14,600,000 $111,473 $ 4,611 $14,706,862
========= ======= ===== =========
</TABLE>
-26-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 3 - Other Investments - Held to Maturity - Continued
------------------------------------
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------- ------------
September 30, 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Federal National Mortgage
Association Bonds $ 500,000 $ - $ 8,000 $ 492,000
Federal Home Loan
Bank Bonds 2,250,000 3,000 21,850 2,231,150
Federal Home Loan
Mortgage Corporation
Bonds 1,000,000 1,000 - 1,001,000
--------- --------- ---------- ---------
$3,750,000 $ 4,000 $ 29,850 $3,724,150
======== ======== ========= =========
</TABLE>
No gains or losses were realized during the years ended September 30, 1998
or 1997.
The scheduled maturities of other investments at September 30, 1998:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- -------------
<S> <C> <C>
Due in one year or less $ 250,000 $ 253,502
Due after five years through ten years 250,000 251,016
Due after ten years 14,100,000 14,202,344
---------- -----------
$ 14,600,000 $ 14,706,862
========= =========
</TABLE>
-27-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 4 - Mortgage Backed Securities
--------------------------
The amortized cost and fair value of mortgage backed securities are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ ------------
September 30, 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $6,823,137 $174,119 $ - $6,997,256
FNMA participating certificates 452,666 9,369 - 462,035
--------- ------- ------------- ---------
$7,275,803 $183,488 $ - $7,459,291
========= ======= ============= =========
September 30, 1997
--------------------------------------------------------
GNMA participating certificates $2,239,384 $ 16,551 $ - $2,255,935
FNMA participating certificates 605,826 - 16,863 588,963
--------- -------- ------------- ---------
$2,845,210 $ 16,551 $ 16,863 $2,844,898
========= ======== ============= =========
</TABLE>
No gains or losses were realized during the years ended September 30, 1998
and 1997.
-28-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 5 - Loans Receivable
----------------
Loans receivable at September 30, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
One to four family residential mortgage loans $67,057,267 $71,185,272
Multifamily residential mortgage loans 92,008 98,855
Commercial mortgage loans 4,799,463 3,292,479
Construction loans 1,967,500 1,462,000
Lines of credit 2,031,161 1,036,125
Land/lot loans 952,173 2,126,751
Home improvement loans 5,668 6,632
Share loans 260,565 299,795
Commercial loans secured by lease
finance receivables 853,408 1,075,147
---------- ----------
78,019,213 80,583,056
Less - undisbursed portion of loans
in process (1,713,800) (1,198,222)
- unamortized discount on loans
purchased (125,337) (146,514)
- deferred loan origination fees (520,673) (537,950)
- allowance for loan losses (301,425) (250,000)
---------- ----------
$75,357,978 $78,450,370
========== ==========
</TABLE>
The following is a summary of the allowance for loan losses:
<TABLE>
<CAPTION>
September 30,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Beginning balance $250,000 $195,000
Provision for loan losses 195,000 60,644
Charge-offs (143,575) (5,644)
------- -------
Balance end $301,425 $250,000
======= =======
</TABLE>
-29-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 5 - Loans Receivable - Continued
----------------
Residential lending is generally considered to involve less risk than other
forms of lending, although payment experience on these loans is dependent to
some extent on economic and market conditions in the Bank's lending area.
Multifamily residential, commercial, construction and other loan repayments are
generally dependent on the operations of the related properties or the financial
condition of its borrower or guarantor. Accordingly, repayment of such loans can
be more susceptible to adverse conditions in the real estate market and the
regional economy.
Substantially all of the Bank's loans receivable are mortgage loans secured
by residential and commercial real estate properties located in the State of
Maryland. Loans are extended only after evaluation by management of customers'
creditworthiness and other relevant factors on a case-by-case basis. The Bank
generally does not lend more than 90% of the appraised value of a property and
requires private mortgage insurance on residential mortgages with loan-to-value
ratios in excess of 80%. In addition, the Bank generally obtains personal
guarantees of repayment from borrowers and/or others for multifamily
residential, commercial and construction loans and disburses the proceeds of
construction and similar loans only as work progresses on the related projects.
There were no impaired loans as defined by SFAS No. 114 at September 30,
1998. There was no interest income recognized on impaired loans during that
period.
Impaired loans as defined by SFAS No. 114 are summarized as follows for the
year ended September 30, 1997.
<TABLE>
<CAPTION>
<S> <C>
Recorded investment $76,036
Allowance for loan losses -
</TABLE>
Impaired loans as defined by SFAS No. 114 for which interest income has
been reduced are as follows for the year ended September 30, 1997.
<TABLE>
<CAPTION>
<S> <C>
Interest income that would have been recorded $7,095
Interest income recognized -
=====
Total income not recognized $7,095
=====
</TABLE>
The Bank was not committed to fund additional amounts on these loans.
-30-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 5 - Loans Receivable - Continued
----------------
Non-accrual loans that are not subject to SFAS No. 114 for which interest
has been reduced totaled approximately $382,725 and $761,249 at September 30,
1998 and 1997.
Interest income that would have been recorded under the original terms of
such loans and the interest actually recognized for the years ended September
30, are summarized below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income that would have
been recognized $30,781 $ 93,191
Interest income recognized 5,390 53,151
------- -------
Interest income not recognized $25,391 $ 40,040
====== ======
</TABLE>
Loans outstanding to officers and directors and their affiliates of the
Bank at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Balance At Balance At Balance At
September Loans Principal September Loans Principal September
30, 1998 Made Repayment 30, 1997 Made Repayment 30, 1996
- ----------- ----- --------- ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$1,542,216 $213,104 $48,546 $1,377,658 $127,500 $ 29,545 $1,279,703
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
at September 30, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Mortgage loan portfolios serviced for:
Other investors $ 7,038,699 $ 8,601,204
========= =========
</TABLE>
Custodial Escrow balances maintained in connection with the foregoing loan
servicings were approximately $36,799 and $44,019 at September 30, 1998 and
1997.
-31-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 5 - Loans Receivable - Continued
----------------
Unless otherwise noted, the Bank requires collateral or other security to
support financial instruments with off-balance-sheet credit risk.
<TABLE>
<CAPTION>
Financial Instruments Whose Contract Contract Amount
Amounts Represent Credit Risk At September 30,
- ------------------------------------ -------------------------------
1998 1997
---- ----
<S> <C> <C>
Loan commitments $1,084,750 $2,809,700
Unused lines of credit 1,646,339 -
</TABLE>
Mortgage loan commitments not reflected in the accompanying financial
statements at September 30, 1998 are for fixed rate mortgages totaling
$1,084,750 ranging from 6.75% to 7.75%.
Mortgage loan commitments not reflected in the accompanying financial
statements at September 30, 1997 are $1,000,000 for adjustable rate mortgages
ranging from 7.00% to 10.00% and fixed rate mortgages totaling $1,809,700
ranging from 7.00% to 9.05%.
Lines of credit are loan commitments to individuals and companies and have
fixed expiration dates as long as there is no violation of any condition
established in the contract. The Bank evaluates each customer's credit
worthiness on a case-by-case basis.
The credit risk involved in these financial instruments is essentially the
same as that involved in extending loan facilities to customers. No amount has
been recognized in the statement of financial condition at September 30, 1998 as
a liability for credit loss.
Note 6 - Investment in Federal Home Loan Bank of Atlanta Stock
-----------------------------------------------------
The Bank is required to maintain an investment in the stock of the Federal
Home Loan Bank of Atlanta ("FHLB") in an amount equal to at least 1% of the
unpaid principal balances of the Bank's residential mortgage loans or 1/20 of
its outstanding advances from the FHLB, whichever is greater. Purchases and
sales of stock are made directly with the FHLB at par value.
-32-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 7 - Investment in and Loans to Affiliated Corporation
-------------------------------------------------
Bankers Affiliate, Inc., formerly "Cash, Inc.", was organized in April 1983
as a service corporation. It is equally owned by the Bank and two other thrift
institutions and makes consumer loans to their customers. Loans to Bankers
Affiliate, Inc. are due on demand and bear an adjustable interest rate. The Bank
has a 33-1/3% interest in this company and its proportionate share of income or
losses has not been recorded on the equity method, since such amounts are not
material to the accompanying consolidated financial statements. The Bank is
using the cost method of accounting to record this investment.
The Bank's investment in and loans to an affiliated corporation, Bankers
Affiliate, Inc. (See Note 1) are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Capital stock, at cost $ 25,000 $ 25,000
Loan payable 2,550,000 2,900,000
--------- ---------
$2,575,000 $2,925,000
======== ========
</TABLE>
Summarized financial information as of June 30, 1998 and 1997 and for the
years ended June 30, 1998 and 1997 for Bankers Affiliate, Inc. are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash $ 24,587 $ 191,991
Finance receivables 8,153,347 8,319,201
Real estate acquired through foreclosure 31,103 101,851
Other assets 42,571 46,729
----------- -----------
$8,251,608 $8,659,772
========= =========
Loans payable $8,150,000 $8,550,000
Other liabilities 21,596 27,670
--------- ---------
8,171,596 8,577,670
Stockholders' equity 80,012 82,102
--------- ---------
$8,251,608 $8,659,772
========= =========
</TABLE>
-33-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 7 - Investment in and Loans to Affiliated Corporation - Continued
-------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Income and Expense
Income:
Interest $857,925 $830,949
Other income 32,330 37,865
-------- --------
890,255 868,814
Expenses:
Interest 636,195 588,769
Provision for losses on loans 32,515 67,788
Salaries and related expenses 149,744 143,175
Other expenses 79,249 60,575
-------- --------
897,703 860,307
------- -------
Income (loss) before income tax provision (benefit) (7,448) 8,507
Income tax provision (benefit) (5,358) (7,636)
--------- --------
Net income (loss) (2,090) 16,143
Retained earnings (deficit) at beginning
of fiscal year 7,102 (9,041)
-------- --------
Retained earnings at end of fiscal year $ 5,012 $ 7,102
======== ========
</TABLE>
Note 8 - Premises and Equipment
----------------------
Premises and equipment at September 30, 1998 and 1997 are summarized by
major classification as follows:
<TABLE>
<CAPTION>
Useful Life
1998 1997 in Years
---- ---- -------------
<S> <C> <C> <C>
Land $ 224,056 $ 224,056 -
Office buildings 602,549 602,549 5-50
Furniture, fixtures and equipment 862,980 823,253 3-20
---------- ----------
1,689,585 1,649,858
Accumulated depreciation (812,659) (927,926)
--------- ---------
$ 876,926 $ 721,932
========= =========
</TABLE>
-34-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 8 - Premises and Equipment - Continued
----------------------
The provision for depreciation for the periods ended September 30, 1998 and
1997 was $82,404 and $66,782, respectively.
The Bank has entered into several operating leases for the premises of its
branch offices. Rental expense under these leases for the years ended September
30, 1998 and 1997 was $60,523 and $62,262, respectively. At September 30, 1998,
the minimum rental commitments under noncancellable leases are as follows:
<TABLE>
<CAPTION>
Year Ended September 30, Total
- ------------------------ -----
<S> <C>
1999 $ 59,663
2000 51,903
2001 27,856
2002 3,600
-------
$143,022
=======
</TABLE>
Note 9 - Deposits
--------
Deposits are summarized as follows at September 30:
<TABLE>
<CAPTION>
1998 1997
------------------------ --------------------------
Weighted- Weighted-
Average Average
Type of Account Amount Rate Amount Rate
- --------------- ------ ---- ------ ----
<S> <C> <C> <C> <C>
NOW and money market accounts
including non-interest bearing
deposits of $981,343 in 1998
and $352,330 in 1997 $11,586,661 2.33% $11,628,286 1.22%
Passbook savings 14,726,868 3.05% 15,208,888 3.05%
Certificates of deposit 68,752,209 5.82% 47,348,677 5.74%
---------- ----------
95,065,738 74,185,851
Accrued interest 184 261
---------- ----------
$95,065,922 $74,186,112
========== ==========
</TABLE>
-35-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 9 - Deposits - Continued
--------
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $5,883,859 and $3,455,658 at September 30, 1998
and 1997. Deposits in excess of $100,000 are not insured by the Savings
Association Insurance Fund.
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
Amount Amount
------ ------
<S> <C> <C>
Certificates accounts mature as follows:
One year or less $32,396,930 $28,718,790
More than 1 year through 2 years 14,801,388 9,654,831
More than 2 years through 3 years 6,384,738 3,518,357
More than 3 years 15,169,153 5,456,699
---------- ----------
$68,752,209 $47,348,677
========== ==========
</TABLE>
Interest expense on deposits is summarized as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Certificates $3,201,106 $2,454,305
NOW and money market 294,378 292,045
Passbook 444,271 473,499
--------- ---------
$3,939,755 $3,219,849
========= =========
</TABLE>
-36-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 10- Borrowings
----------
The Company's borrowings at September 30 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Short-term Federal Home Loan Bank advances $ 9,000,000 $ 4,000,000
Long-term Federal Home Loan Bank advances 11,000,000 -
Other 937,168 -
---------- -----------
Total $ 20,937,168 $ 4,000,000
========== ===========
</TABLE>
Federal Home Loan Bank advances at September 30, 1998 consist of short term
fixed and adjustable rate advances bearing interest at 5.6475% to 6.02% per
annum and long term fixed rate advances bearing interest at 5.51% to 5.52% per
annum.
The Bank's stock in the Federal Home Loan Bank of Atlanta is pledged as
security for the loan and under a blanket floating lien security agreement with
the Federal Home Loan Bank of Atlanta, the Bank is required to maintain as
collateral for its advances, qualified home mortgage loans in an amount equal to
175% of the advances.
Other borrowings consist of an long-term note currently bearing interest at
8.5%. The interest rate is adjusted quarterly and is based on the commercial
prime rate. The note is repayable over the next eight years. The Company has the
option to repurchase the note any time after February 1, 1999.
Aggregate maturities required on Federal Home Loan Bank advances and the
note, at September 30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
September 30, 1999 $ 9,129,604
September 30, 2000 129,604
September 30, 2001 129,604
September 30, 2002 129,604
September 30, 2003 5,129,604
After September 30, 2003 6,289,148
----------
Total $20,937,168
==========
</TABLE>
-37-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 11- Pension Plan
------------
Substantially all employees of the Bank are included in a non-contributory
defined benefit pension plan. The Bank's policy is to fund pension costs
accrued. There were no unfunded or unamortized prior service costs at September
30, 1998 and 1997. The costs of funding this plan were $21,240 and $18,534 for
the years ended September 30, 1998 and 1997, respectively.
The following table sets forth the plan's related costs at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Service cost $20,479 $ 21,599
Interest cost 48,224 44,363
Actual return on plan assets (37,216) (44,093)
Other components (10,247) (3,335)
------ --------
Net period pension costs $21,240 $ 18,534
====== ======
</TABLE>
The following table sets forth the plan's funded status at September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accumulated Benefit Obligation
Vested $509,795 $444,441
Non-vested 4,522 3,133
------- -------
Total $514,317 $447,574
======= =======
Projected benefit obligation $762,500 $701,623
Fair value of plan assets as of September 30 722,564 664,051
------- -------
Plan assets in deficit of projected
benefit obligation (39,936) (37,572)
Unrecognized net loss 168,620 129,729
Unrecognized net transition obligation 2,025 2,227
------- -------
Prepaid pension cost $130,709 $ 94,384
======= ======
</TABLE>
-38-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 11- Pension Plan - Continued
------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Reconciliation of Projected Benefit Obligation
----------------------------------------------
Projected benefit obligation beginning of year $701,623 $677,176
Interest cost for the fiscal year 48,224 44,363
Service cost for the fiscal year 20,479 21,599
Benefit payments for the fiscal year (36,268) -
Actuarial (gain) loss for the fiscal year 28,442 69,301
------- -------
Projected benefit obligation as of September 30
before settlement 762,500 812,439
Effect of settlement - (110,816)
------- -------
Projected benefit obligation as of September 30
after settlement $762,500 $701,623
======= =======
</TABLE>
The following interest rate assumptions were used for September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted-average discount rate 7.00% 7.25%
Long term rate of return 8.00% 8.00%
Rate of compensation increase 4.50% 4.00%
</TABLE>
Note 12- Common Stock and Stock Benefit Plans
------------------------------------
In 1996, the Bank converted from a federally chartered mutual savings bank
to a federally chartered stock savings bank. Simultaneously, the Bank
consummated the formation of a new holding company, WHG Bancshares Corporation,
of which the Bank is a wholly-owned subsidiary. In connection with the
conversion, the Company issued 1,620,062 shares of its common stock.
The Bank has established an Employee Stock Ownership Plan ("ESOP"), and
acquired 129,604 shares of the Company's common stock. The Employee Stock
Ownership Plan purchased 30,616 additional shares with the proceeds from the
special distribution. Funds used to acquire the initial shares were borrowed
from the Company by the ESOP with a direct loan from the Company requiring
annual payments of $129,604. During the fiscal year ended September 30, 1998 the
Company assigned the loan to a third party with the option to repurchase the
loan at anytime after February 1, 1999.
-39-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 12- Common Stock and Stock Benefit Plans - Continued
------------------------------------
The ESOP holds the common stock in a Trust for allocation among
participating employees.
All employees of the Bank who have completed one year of service and
attained the age of 21 are eligible to participate. Participants will become
100% vested in their accounts after five years of service with the Bank or
earlier upon death, disability or retirement.
The ESOP is funded by contributions made by the Bank in cash or common
stock and dividends on the shares held in the Trust. The Bank recognizes
compensation expense as shares are committed for release from collateral at
their current market price. Dividends on allocated shares are recorded as a
reduction of retained earnings and dividends on unallocated shares are recorded
as a reduction of Debt. Compensation cost for the year ended September 30, 1998
and 1997 was $230,919 and $213,619, respectively.
The ESOP shares as of September 30 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allocated shares 35,887 17,132
Shares earned, but unallocated 2,160 2,160
Unearned shares 91,557 108,220
Fair value of unearned shares at September 30 $1,064,350 $1,785,630
</TABLE>
The Company has a Stock Option Plan (the "Plan") whereby 183,058 shares of
common stock have been reserved for issuance under the Plan. Options granted
under the Plan may be Incentive Stock Options within the meaning of Section 422
of the Internal Revenue Code of 1986 as amended or Non-Incentive Stock Options.
Options are exercisable in five annual installments at the market price of
common stock at the date of grant. The Options must be exercised within ten
years from the date of grant. During the year ended September 30, 1997, the
Company granted options to purchase 162,006 shares at a weighted average price
of $13.30 per share. Such shares and fair value have been adjusted to 183,058
shares at a weighted average price of $11.77 for the effect of the special
distribution that management anticipates will be a return of capital.
-40-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 12- Common Stock and Stock Benefit Plans - Continued
------------------------------------
The following table summarizes the status of and changes in the Company's
stock option plan during the past two years, as retroactively adjusted for the
Company's special distribution that management anticipates will constitute a
return of capital.
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
------ -----
<S> <C> <C>
Outstanding at September 30, 1996 - -
Granted 183,058 $11.77
-------
Outstanding at September 30, 1997 183,058 11.77
------- -----
Outstanding at September 30, 1998 183,058 11.77
======= =====
Exercisable at September 30, 1998 35,922
=======
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the Bank
to make certain disclosures as if the fair value method of accounting had been
applied to the Bank's stock option grants made subsequent to 1994. Accordingly,
the Bank estimated the grant date fair value of each option awarded in fiscal
1997 using the Black-Scholes Option-Pricing model with the following relevant
assumptions: dividend yield of 1.3%, risk-free interest rate of 6.67% and
expected lives of 10 years. The assumption for expected volatility was 18.17%.
Had 1997 compensation cost been determined including the weighted-average
estimate of fair value of each option granted of $5.31, the Bank's net income
would be reduced to proforma amount of $226,125. Proforma earnings, basic and
diluted, per share would have been $.16 in fiscal 1997.
The Company has established a Management Stock Bonus Plan (the "Stock Bonus
Plan" or "MSBP") to encourage directors, officers and key employees to remain in
the service of the Bank. Up to 64,802 shares of common stock may be awarded
under the terms of the Stock Bonus Plan. Shares of common stock awarded under
the plan vest in five annual installments at a rate of 20% each year following
the date of grant. On October 8, 1996, awards of 55,860 shares of common stock
were granted. On November 22, 1996, the Bank funded the purchase of 64,802
shares of its common stock at a price of $13.62 to provide shares for
distribution under the Stock Bonus Plan.
-41-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 12- Common Stock and Stock Benefit Plans - Continued
------------------------------------
During fiscal 1998, the Company declared a special distribution of $3.00
per common stock share from funds retained by the Company in the conversion.
Management anticipates that this will constitute a return of capital.
Accordingly, the Company charged the return of capital distribution to
additional paid-in-capital. Management has obtained a Private Letter Ruling from
the Internal Revenue Service which states that the Company's dividend payments
in excess of accumulated earnings and profits are considered a tax-free return
of capital for federal income tax purposes. As a result, management believes the
entire distribution constitutes a tax-free return of capital. However, final
determination cannot be made until December 31, 1998.
Note 13- Retained Earnings
-----------------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possible additional discretionary, actions
by the regulators that, if undertaken, could have a direct material effect on
the Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) and
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1998, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1998, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category. The Bank's actual capital amounts and ratios are also presented in the
table.
-42-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 13- Retained Earnings - Continued
-----------------
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------------ -----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Tangible (1) $16,374,614 12.3% $ 1,994,442 1.5% $ N/A N/A%
Tier I capital (2) $16,374,614 28.8% $ N/A N/A% $ 3,411,420 6.0%
Core (1) $16,374,614 12.3% $ 3,988,884 3.0% $ 6,648,140 5.0%
Risk-weighted (2) $16,626,614 29.2% $ 4,548,560 8.0% $ 5,685,700 10.0%
</TABLE>
(1) To adjusted total assets.
(2) To risk-weighted assets.
The following table presents the calculation of risk-based capital and
tangible assets used to determine the Bank's capital position.
Current Requirements
--------------------
Total stockholders' equity $ 16,242,716
Add: Negative equity of parent company 209,731
Less: Non-allowable items
Intangible assets (1,190)
Net unrealized gains on available for sale of securities (76,643)
-----------
Tangible and core capital 16,374,614
General valuation allowance 252,000
-----------
Risk-based capital $ 16,626,614
===========
Total assets $132,876,472
Loans to parent company 1,600,000
Less: Unrealized gains on securities
available for sale (76,643)
Intangible assets (1,190)
Asset of parent company (1,435,840)
-----------
Tangible and adjusted tangible assets $132,962,799
===========
Risk-weighted assets $ 56,857,000
===========
-43-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 14- Income Taxes
------------
The income tax provision consists of the following:
<TABLE>
<CAPTION>
For Years Ended
September 30,
------------------
1998 1997
---- ----
<S> <C> <C>
Current
Federal $432,533 $276,262
State 93,712 62,179
------- -------
526,245 338,441
Deferred
Federal (31,343) 133,736
State (7,140) 28,657
------- -------
(38,483) 162,393
Other
Market value adjustments for Employee Stock
Ownership Plan and Management Stock
Bonus Plan
Federal (23,112) -
State (4,758) -
------- -------
(27,870) -
------- -------
$ 459,892 $500,834
======= =======
</TABLE>
The amount computed by applying the statutory federal income tax rate to
income before taxes differs from the taxes provided for the following reasons:
<TABLE>
<CAPTION>
Years Ended September 30,
1998 1997
Percent Percent
of Pretax of Pretax
Amount Income Amount Income
------ ------ ------ ------
<S> <C> <C> <C> <C>
Tax at statutory rate $387,760 34.00 $426,693 34 .00
Increases (Decreases)
Resulting From
--------------
State income tax net of
federal income tax benefit 53,997 4.73 59,951 4.78
Other 18,135 1.59 14,190 1.13
------- ------ ------- -----
$459,892 40.32 $500,834 39.91
======= ====== ======= =====
</TABLE>
-44-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 14- Income Taxes - Continued
------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
Deferred Tax Assets:
<S> <C> <C>
Deferred loan origination fees $201,084 $207,757
Allowance for loan losses 116,411 96,550
Reserve for uncollected interest 9,806 13,639
ESOP contribution 8,331 8,331
Net unrealized holding losses 15,818 -
Other 20,101 -
NOL carryforward of subsidiary 5,566 14,834
--------- --------
Total gross deferred tax assets 377,117 341,111
Deferred Tax Liabilities:
Tax reserve for bad debts in excess of
base year amount 81,134 106,098
Federal Home Loan Bank of Atlanta stock
dividends 56,965 56,965
Depreciation 17,843 25,203
Pension plan 50,480 36,451
-------- --------
Total gross deferred tax liabilities 206,422 224,717
------- -------
Net deferred tax assets $170,695 $116,394
======= =======
</TABLE>
One of the Company's subsidiaries has a NOL carryforward in the amount of
$14,411 that expires in 2012.
The Company and its Subsidiaries file their income tax returns on a
calendar year basis.
Note 15- Disclosure About Fair Value of Financial Instruments
----------------------------------------------------
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques prescribed by
the FASB and may not be indicative of the net realizable or liquidation values.
Also, the calculation of estimated fair values is based on market conditions at
a specific point in time and may not reflect current or future fair values.
-45-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 15- Disclosure About Fair Value of Financial Instruments - Continued
----------------------------------------------------
The carrying amount is a reasonable estimate of fair value for cash,
federal funds, interest-bearing deposits in other banks and securities purchased
under agreements to resell due to the short-term nature of these investments.
Fair value is based upon market prices quoted by dealers for investment
securities and mortgage backed securities. The carrying amount of Federal Home
Loan Bank of Atlanta stock is a reasonable estimate of fair value. Loans
receivable were discounted using a single discount rate, comparing the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities, except for adjustable rate
mortgages which were considered to be at market rates. These rates were used for
each aggregated category of loans as reported on the Office of Thrift
Supervision Quarterly Report. The fair value of demand deposits, savings
accounts and money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using the rates currently offered on deposits of similar remaining
maturities.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business, including loan commitments. The loan commitments
were a blended rate based on the relative risk of the properties involved and
the lines of credit are at adjustable rates.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1998
------------------
Carrying Estimated
Value Fair Value
----- ----------
<S> <C> <C>
Financial Assets
- ----------------
Cash, interest-bearing deposits
in other banks and federal funds $14,422,780 $14,422,780
Securities available for sale 15,191,491 15,191,491
Investment securities held to maturity 14,600,000 14,706,862
Mortgage backed securities 7,275,803 7,459,291
Loans receivable 75,357,978 77,370,000
Federal Home Loan Bank of Atlanta
stock 1,000,000 1,000,000
Financial Liabilities
- ---------------------
Deposits $95,065,922 $95,448,000
Commitments - 1,084,750
</TABLE>
-46-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 16- Condensed Financial Information (Parent Company Only)
----------------------------------------------------
Information as to the financial position of WHG Bancshares Corporation as
of September 30, 1998 and 1997 and results of operations and cash flows for the
two years ended September 30, 1998 is summarized below. During the years ended
September 30, 1998 and 1997, the parent did not receive any dividends from its
subsidiary, the Bank.
1998 1997
---- ----
Statements of Financial Condition
Cash $ - $ 21,465
Federal funds sold 578,000 206,935
Interest-bearing deposits - 145,679
Securities available for sale 561,625 -
Loans receivable 125,574 4,103,794
Equity in net assets of subsidiary 16,375,804 15,333,901
Deferred income taxes 64,041 -
Other assets 114,097 24,554
---------- ----------
$17,819,141 $19,836,328
========== ==========
Checks outstanding in excess of bank balance $ 11,077 $ -
Borrowings 1,600,000 -
Taxes payable - 6,195
Other liabilities 41,991 1,000
Stockholders' equity 16,166,073 19,829,133
---------- ----------
$17,819,141 $19,836,328
========= =========
-47-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 16- Condensed Financial Information (Parent Company Only) - Continued
----------------------------------------------------
For the years ended September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
Statements of Operations
<S> <C> <C>
Interest Income $ 244,178 $ 428,415
Gain on sale of securities 13,718 -
Equity in net income of subsidiary 652,507 519,213
------------ ------------
Total income 910,403 947,628
Interest expense 12,175 -
Non-interest expenses 186,582 57,645
------------ ------------
Total operating expenses 198,757 57,645
------------ ------------
Net income before income taxes 711,646 889,983
Provision for income taxes 31,067 135,836
------------ ------------
Net income $ 680,579 $ 754,147
============ ============
</TABLE>
For the years ended September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statements of Cash Flows
Cash Flows from Operating Activities:
Net income $ 680,579 $ 754,147
Adjustment to Reconcile Net Income to Net
Cash Provided by Operating Activities
Equity in net income of subsidiary (652,507) (519,213)
Gain on sale of securities (13,718) -
Increase in other assets (89,543) (16,196)
Decrease in taxes payable (6,195) (77,978)
Increase in other liabilities 40,991 1,000
----------- ----------
Net cash provided (used) by operating
activities (40,393) 141,760
</TABLE>
-48-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 16- Condensed Financial Information (Parent Company Only) - Continued
----------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Investing Activities:
Proceeds from interest-bearing deposits $ 145,679 $ -
Purchase of interest-bearing deposits - (145,679)
Proceeds from sales of securities 202,043 -
Purchase of securities (915,774) -
Decrease in securities purchased
under agreement to resell - 2,000,000
Loans purchased (126,078) (2,000,000)
Principal collected on loans 3,167,130 3,149,045
Proceeds from assignment of ESOP loan 937,168 -
----------- -----------
Cash provided by investing activities 3,410,168 3,003,366
Cash Flows from Financing Activities:
Increase in checks outstanding in excess
of bank balance 11,077 -
Net increase in borrowings 1,600,000 -
Repurchase of common stock (53,754) (3,370,173)
Dividends paid (410,492) (283,808)
Special distribution (4,167,006) -
---------- -----------
Net cash used by financing activities (3,020,175) (3,653,981)
---------- -----------
(Decrease) increase in cash and cash
equivalents $ 349,600 $ (508,855)
Cash and cash equivalents at beginning of year 228,400 737,255
---------- -----------
Cash and cash equivalents at end of year $ 578,000 $ 228,400
========== ==========
Supplemental Disclosures of Cash Flows Information:
Income taxes $ 141,887 $ 121,714
======== ========
Interest paid $ 12,175 $ -
======== ========
</TABLE>
-49-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 17- Recent Accounting Pronouncements
--------------------------------
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997.
This Statement requires that comprehensive income - made up of all revenues,
expenses, gains and losses - be reported and displayed in an entity's financial
statements with the same prominence as its other financial statements.
Currently, the only item that would be presented as a component of the Company's
comprehensive income which is not also a component of its net income is the
change during the year in unrealized gain or loss on available for sale
securities. The Statement, which is effective for years beginning after December
15, 1997, will not affect the Company's financial position or its results of
operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was also issued in June 1997. This Statement requires that public
business enterprises report financial and descriptive information about their
reportable operating segments. Reportable operating segments are defined as
components of an enterprise about which separate financial information is
available and is evaluated regularly by the chief operating decision maker as a
basis for allocating resources and assessing performance. It also requires those
enterprises to report information about countries in which they do business and
about major customers. The Statement, which is effective for financial
statements for periods beginning after December 15, 1997, will not affect the
Company's financial position or its results of operations.
SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" was issued in February 1998. This Statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable. The Statement, which is effective for fiscal
years beginning after December 15, 1997, will not affect the Company's financial
position or its results of operations.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June, 1998. This Statement standardizes the accounting
for derivative instruments including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize these items as assets or
liabilities in the statement of financial position and measure them at fair
value. This Statement generally provides for matching the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the
fair value of the hedged asset or liability that are attributable to the hedged
risk or the earnings effect of the hedged forecasted transaction. The Statement,
which is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999, will not affect the Company's financial position or its results
of operations.
-50-
<PAGE>
WHG BANCSHARES CORPORATION AND SUBSIDIARIES
- -------------------------------------------
Lutherville, Maryland
- ---------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
SEPTEMBER 30, 1998
- ------------------
Note 17- Recent Accounting Pronouncements - Continued
--------------------------------
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". This Statement provides guidance on the financial reporting of
start-up cost and organization cost. It requires costs of start-up activities
and organization cost to be expensed as incurred. The "SOP" also requires the
initial application to be reported as a cumulative effect of a change in
accounting principle. This "SOP" which is effective for fiscal years beginning
after December 15, 1998 will not affect the Company's financial position or
results of operations.
-51-
<PAGE>
WHG BANCSHARES CORPORATION
1505 York Road
Lutherville, Maryland 21093
(410) 583-8700
HERITAGE SAVINGS BANK, F.S.B.
Hamilton Office Main Office Woodlawn Office
4228 Harford Road 1505 York Road Gwynn Oak Avenue and Windsor
Baltimore, Maryland Lutherville, Maryland Mill Road
Baltimore, Maryland
Ellicott City Office Golden Ring Office
9396 Baltimore National Pike 8767K Philadelphia Road
Ellicott City, Maryland Baltimore, Maryland
Board of Directors of WHG Bancshares Corporation
and
Heritage Savings Bank, F.S.B.
John E. Lufburrow Philip W. Chase, Jr.
Chairman of the Board Retired - Chase, Fitzgerald & Co
Herbert A. Davis (real estate brokerage)
President - Herbert Davis Assoc. Urban P. Francis, Jr.
(real estate brokerage and development) Retired - electrical contractor
D. Edward Lauterbach, Jr. Edwin C. Muhly, Jr.
Consultant - insurance company Retired - baker
Hugh P. McCormick Herbert W. Spath
Retired - McCormick & Co. (spices) Retired - bank executive
August J. Seifert Peggy J. Stewart
Chairman - Seifert's Florist President and Chief Executive Officer
Executive Officers of WHG Bancshares Corporation and
Heritage Savings Bank, F.S.B.
Peggy J. Stewart
President and Chief Executive Officer
Robin L. Taylor Diana L. Rohrback
Controller Vice President and Corporate Secretary
Nicholas C. Tracht Daniel J. Gallagher
Vice President and Security Officer Vice President and Chief Financial Officer
-------------------------------------
Corporate Counsel Independent Auditors
Robert L. Stocksdale, Esquire Anderson Associates, LLP
Stocksdale, Jarrell & Cvach Certified Public Accountants
6717 Harford Road 7621 Fitch Lane
Baltimore, Maryland 21234 Baltimore, Maryland 21236
Special Counsel Transfer Agent and Registrar
Malizia, Spidi, Sloane & Fisch, P.C. American Stock Transfer & Trust
One Franklin Square Company, 40 Wall Street
1301 K Street, N.W., Suite 700 East New York, New York 10005
Washington, D.C. 20005 (718) 921-8208
The Company's Annual Report for the year ended September 30, 1998 on Form 10-KSB
is available without charge upon written request. For a copy of the Form 10-KSB
or any other investor information, please write or call Mrs. Peggy J. Stewart,
President and Chief Executive Officer at the Company's Office. The Annual
Meeting of Stockholders will be held on January 19, 1999 at 10:00 a.m. at the
Holiday Inn, 2004 Greenspring Drive, Timonium, Maryland.
-52-
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation of our report,
dated December 10, 1998, incorporated by reference in this annual report of
WHG Bancshares Corporation on Form 10KSB, into the Corporation's previously
filed Form S-8 Registration Statement File No. 333=34659.
Baltimore, Maryland /s/Anderson Associates LLP
December 22. 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,179
<INT-BEARING-DEPOSITS> 9,849
<FED-FUNDS-SOLD> 3,394
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,191
<INVESTMENTS-CARRYING> 21,876
<INVESTMENTS-MARKET> 22,166
<LOANS> 75,358
<ALLOWANCE> 301
<TOTAL-ASSETS> 132,876
<DEPOSITS> 95,066
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 631
<LONG-TERM> 11,937
0
0
<COMMON> 139
<OTHER-SE> 16,104
<TOTAL-LIABILITIES-AND-EQUITY> 132,876
<INTEREST-LOAN> 6,012
<INTEREST-INVEST> 1,783
<INTEREST-OTHER> 645
<INTEREST-TOTAL> 8,439
<INTEREST-DEPOSIT> 3,940
<INTEREST-EXPENSE> 4,652
<INTEREST-INCOME-NET> 3,787
<LOAN-LOSSES> 195
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 2,867
<INCOME-PRETAX> 1,140
<INCOME-PRE-EXTRAORDINARY> 1,140
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 681
<EPS-PRIMARY> .55
<EPS-DILUTED> .51
<YIELD-ACTUAL> 2.58
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 250
<CHARGE-OFFS> 144
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 301
<ALLOWANCE-DOMESTIC> 301
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
